THE 

TAXATION  OF  MINES 
IN  MONTANA 


BY 


LOUIS  LEVINE,  PH.  D. 

PROFESSOR  OF  ECONOMICS.  STATE  UNIVERSITY  OF  MONTANA 
AUTHOR  OF  "THE  LABOR  MOVEMENT  IN  PRANCE."  ETC. 


NEW  YORK 

B.  W.  HUEBSCH 

MCMXIX 


THE 

TAXATION  OF  MINES 
IN  MONTANA 


BY 
_* 

LOUIS  'LEVINE,  PH.  D. 

PROFESSOR  OF  ECONOMICS.  STATE  UNIVERSITY  OF  MONTANA 
AUTHOR  OF  "THE  LABOR  MOVEMENT  IN  PRANCE."  ETC. 


NEW  YORK 

B.  W.  HUEBSCH 

MCMXIX 


Copyright,  1919,  by 
B.  W.  HUEBSCH 


PREFACE. 

The  author  of  this  essay  on  mine  taxation  has  endeavored  to 
bring  within  the  compass  of  an  accessible  and  readable  volume  the 
facts  and  principles'  which  may  be  considered  the  accepted  and 
standard  ideas  on  the  subject.  There  are  many  phases  of  the 
subject,  such  as  the  relation  of  mine  taxation  to  conservation, 
the  theories  of  the  single  tax,  etc.,  which  the  author  has  in- 
tentionally avoided  because  of  the  purpose  which  this  volume  is 
expected  to  s'erve.  In  brief,  the  purpose  is  to  give  to  the  citizens 
of  Montana  the  available  information  on  the  situation  in  the 
state  as  well  as  the  elementary  and  generally  undisputed  eco- 
nomic principles  involved.  The  essay  is  intentionally  informa- 
tive. It  is  not  to  be  interpreted  as  an  expression  of  the  author's 
ideas  on  the  subject.  In  general,  it  may  be  said  to  point  the 
way  to  the  solution  of  the  problem  in  Montana  along  the  mod- 
erately progressive  lines  followed  by  other  states. 

The  author  is  indebted  to  many  persons  for  assistance  in  the 
preparation  of  this  monograph.  He  wishes  particularly  to  ac- 
knowledge his1  obligations  to  Professor  E.  R.  A.  Seligman  and  to 
Dr.  Murray  Haig  of  Columbia  University  for  reading  the  man- 
uscript and  to  Professor  J.  H.  Underwood  of  the  Univer- 
sity of  Montana  for  many  helpful  suggestions.  The  author 
also  takes'  this  occasion  to  express  his  sincerest  appreciation 
of  the  many  kindnesses  and  of  the  generous  assistance 
given  him  by  the  state  officials  at  Helena,  by  members  of  the 
State  Temporary  Tax  and  License  Commission,  by  the  county  and 
city  officials  of  Miss'oula,  Butte,  and  Helena,  and  by  many  others. 

Missoula,  December  24,  1918. 


CONTENTS 


Page 

PREFACE      3 

Chapter 

I    THE  PROBLEM 7 

II    How  THE  MINES  ARE  TAXED 18 

III  Do  THE  MINES  BEAR  AN  ADDITIONAL  BURDEN 

OP  TAXATION? 26 

IV  TAXES  PAID  BY  MONTANA  MINES    ....  38 
V    WHAT  Is  "NET  PROCEEDS"? 49 

VI    THE  ANACONDA  COPPER  MINING  COMPANY   .  57 

VII    THE  DEFECTS  IN  THE  MONTANA  MINE  TAX 

LAW 74 

VIII    THE  EXHAUSTIBILITY  OF  MINERAL  RESOURCES  78 

IX    THE  ASSUMPTION  OF  RISK  IN  MINING    .    .  98 

X    THE  ASSESSMENT  AND  TAXATION  OF  MINES  114 

XI    PRACTICAL  SUGGESTIONS  139 


CHAPTER  I. 
THE  PROBLEM. 

The  tax  system  of  Montana  has  been  the  subject  of  continued 
criticism  for  many  years.  In  January,  1889,  ten  months  before 
Montana  was  admitted  to  statehood,  Governor  Preston  H.  Leslie, 
in  his  message  to  the  last  territorial  legislature,  penned  the 
following  words:  "If  you  will  take  the  pains  to  study  the 
assessed  values  fixed  upon  the  same  clas's  of  property  in  different 
parts  of  this  territory,  there  will  be  seen  such  a  glaring  differ- 
ence as  to  shock  all  sense  of  fairness  and  every  principle  of 
justice. ' ' 

Governor  Leslie  recommended  that  boards  of  equalization  be 
organized  ' '  with  the  power  to  revise,  harmonize  and  equalize  the 
values  for  assessable  purposes'  all  over  the  territory."  In  July, 
1889,  the  Constitutional  Convention  met  and  framed  the  Con- 
stitution which,  with  minor  amendments,  has  been  the  supreme 
law  of  Montana  since.  During  the  following  few  years  the 
legislative  bodies  of  the  state  laid  the  foundation  of  the  political 
and  legal  structure  of  the  state.  The  Constitution  and  the  laws 
of  the  state  made  provision  for  boards  of  equalization.  But  re- 
gardless of  these  boards,  inequalities  of  taxation  did  not  dis- 
appear. On  the  contrary,  as  time  went  on,  the  inequalities  be- 
came more  "glaring,"  and  called  forth  more  critical  comments. 
In  1899,  ten  years  after  Governor  Leslie's  sharp  words,  Gov- 
ernor Robert  B.  Smith,  in  his  biennial  message  to  the  legislature, 
made  a  sweeping  indictment  of  the  entire  tax  system  of  the 
state.  It  is  interesting  to  quote  from  his  mes&'age  at  some  length 
because  the  accusations  have  not  become  entirely  antiquated. 

"Under  the  present  system  for  the  assessment  of  bank 
stocks,  notes  and  solvent  credits  [wrote  Governor 
Smith],  and  for  the  levy  and  assessment  of  cash 
on  hand,  the  attempt  to  make  an  assessment  has 

so   far   proven    only  a    farce There    are 

several  express  companies  doing  a  large  and  lucrative  busi- 


8  MINE  TAXATION  IN  MONTANA 

ness  in  the  state  of  Montana  that  pay  taxes  simply  upon 
a  horse  and  wagon  in  the  several  cities  of  the  state." 

And  further : 

"Under  the  present  system  of  taxation  the  only  person 
who  bears  his  full  share  and  proportion  of  taxes  is  the 
farmer  with  a  few  acres  of  land  or  the  citizen  who  owns 
a  humble  home  in  town  or  city.  These  people  pay  taxes 
upon  the  full  value  of  their  property.  The  corporations  and 
the  wealthy  classes  of  our  people  evade  taxation  upon  fully 
one-half  of  all  they  possess." 

Governor  Smith  was  a  Populist.  But  his  successor,  Governor 
J.  K.  Toole,  who  was  a  Democrat  and  who  was  called  three  times 
to  the  highest  office  in  the  state,  was  no  less  explicit  in  his  con- 
demnation of  the  tax  situation  in  the  state.  Speaking  to  the 
legislature  in  1903,  he  s'aid :  * '  The  burdens  of  taxation  are  most 
unequally  distributed  now.  Millions  of  dollars  of  money  and 
property  escape  taxation  in  this  state  year  after  year. "  In  1904, 
the  Democratic  party  demanded  in  its  platform  ' '  a  constitutional 
amendment  empowering  the  State  Board  of  Equalization  to  equal- 
ize property  assessments  in  the  state,"  and  thereby  implicitly 
admitted  that  the  assessment  and  taxation  of  property  in  the 
state  resulted  in  inequalities.  The  attack  of  the  Democratic  party 
was  directed  chiefly  against  the  railroads  of  the  state.  In  their 
platform  of  1908,  the  Democrats  congratulated  themselves  on  the 
fact  that  "every  material  advance  in  the  assessment  of  railroad 
property  from  the  sum  of  $3,000  per  mile  to  the  present  rate  of 
assessment  has  been  accomplished  during  Democratic  ascend- 
ancy," and  they  renewed  their  demand  made  in  the  platform  of 
1906  "that  the  property  of  railway  companies  be  assessed  for 
taxation  at  its1  full  cash  value  as  the  law  requires. ' ' 

The  declarations  of  the  Democratic  party,  so  explicit  in  rela- 
tion to  the  railroads,  made  no  reference  to  the  other  corporations 
of  the  state.  But  in  1912  the  Progressive  party  of  the  state, 
under  the  leadership  of  Senator  J.  M.  Dixon,  changed  the  line 
of  attack  and  fixed  its  guns  on  the  Amalgamated  Copper  Mining 
Co.  and  on  the  corporations  of  the  state  in  general.  In 
his  keynote  speech  to  the  state  convention  of  the  Pro- 
gressive party,  Senator  Dixon  referred  to  the  Amalgamated 
Copper  Company  in  the  following  words :  '  *  These  gentle- 


THE  PROBLEM  9 

men    are    paying    on    a    basis    of    about    one-eighteenth    of 

their     real     valuation They     should     be 

paying  about  one-half  of  the  taxes  of  the  state,  on  our  present 
total  assessment.  Then  your  taxes  would  be  reduced  to  just  one- 
third  of  what  they  are  now. ' '  The  Progessive  party  adopted  a 
platform  which  read : 

"We  declare  ourselves  as  being  unalterably  in  favor  of  a 
complete  reform  of  taxation  laws  and  methods  in  Montana, 
to  the  end  that  there  shall  be  a  fair  and  equitable  assess- 
ment of  all  classes  of  property.  We  believe  that  under 
present  conditions  railroads,  the  Amalgamated  Copper  Com- 
pany, and  other  corporations  are  avoiding  the  payment  of 
their  just  proportion  of  the  taxes " 

In  the  face  of  this  violent  attack  on  the  tax  system  of  the 
state  the  Democrats  again  formulated  their  demand  for  "com- 
missions with  full  power  to  adjust  and  equalize  the  assess- 
ment of  property  for  taxation  purposes."  The  platform  of  the 
Republican  party  had  nothing  at  all  to  say  about  taxation. 

The  Democrats  were  successful  in  the  state  elections  of  1912, 
and  the  Thirteenth  Legislative  Assembly  passed  a  law  creating 
a  State  Tax  Commission  which  was  to  consist  of  the  Governor, 
Secretary  of  State,  Attorney  General,  State  Auditor,  State 
Treasurer,  and  one  other  member  to  be  appointed  by  the  Gov- 
ernor and  known  as  State  Tax  Commissioner.  In  1914  the  State 
Tax  Commissioner  published  his  first  and  last  biennial  report 
in  which  many  defects  of  the  tax  procedure  in  the  state  were 
discussed.  The  Tax  Commissioner  pointed  out  especially  that 
considerable  tracts  of  land  in  various  counties  were  escaping 
taxation,  and  that  lands  of  the  same  quality  were  most  un- 
equally assessed.  The  Commissioner  confirmed  in  his  report  the 
opinion  prevalent  throughout  the  state  "that  the  great  funda- 
mental defect  in  our  system  is  the  lack  of  state  equalization," 
and  urged  the  necessity  of  central  supervision  over  the  assess- 
ment of  property  in  the  state.  His  idea  seemingly  had  the 
support  of  the  Democratic  party  which  declared  in  its  platform 
of  1914  for  "the  extension  of  the  powers  of  the  State  Tax  Com- 
mission and  the  State  Board  of  Equalization,  so  as  to  bring  about 
a  more  equitable  system  of  taxation  in  this  state."  The  Four- 
teenth Legislative  Assembly,  however,  which  consisted  of  a  Dem- 


10  MINE  TAXATION  IN  MONTANA 

ocratic  House  and  a  Republican  Senate,  abolished  the  State  Tax 
Commission. 

During  the  campaign  of  1916,  the  question  of  taxation  was 
again  a  serious  issue.  The  Republicans,  now  reunited  with  the 
Progressives,  declared  in  their  platform  for  "an  equitable  and 
just  distribution  of  the  burdens  of  taxation"  and  pledged  their 
candidates  ' '  to  secure  that  condition  either  by  legislation  or  con- 
stitutional amendment."  The  Republicans  also  declared  spe- 
cifically in  favor  of  "a  license  tax  upon  the  net  profits  of 
mines, ' '  and  thus  helped  to  center  attention  once  more  upon  the 
question  of  mine  taxation.  The  Democrats  declared  them- 
selves in  favor  of  a  "non-partisan  commission  to  make  a  study 
of  present  methods  of  taxation  and  to  draft  such  constitutional 
and  statutory  amendments  as  may  be  adequate  to  equalize  tax- 
ation." 

The  discussion  of  the  tax  situation  in  the  state  reached  its 
climax  during  the  session  of  the  Fifteenth  Legislative  Assembly. 
Governor  Sam  V.  Stewart  started  the  discussion  by  calling  at- 
tention in  his  message  to  the  legislature  to  the  inadequate  con- 
dition of  state  finances,  to  the  large  deficit,  and  to  the  necessity 
of  finding  new  sources  of  state  revenue.  Both  the  House  and 
the  Senate  appointed  "Tax  Investigation  Committees."  The 
report  of  the  "Tax  Investigation  Committee  of  the  Senate," 
though  brief,  summed  up  the  situation  in  the  state  in  a  manner 
which  deserves  especial  attention. 

"We  find  [wrote  the  Committee]  that  there  is  great  in- 
equality in  the  assessment  in  the  several  counties  of  the  same 
class  of  property,  such  as  land,  livestock,  banks,  etc.,  which 
are  assessed  on  a  much  higher  percentage  in  some  counties 
than  in  others That  the  large  mining  com- 
panies, the  hydro-electric  companies,  the  express  companies, 
and  the  Pullman  Car  companies  are  not  paying  their  pro- 
portionate share  of  the  State's  taxes A  great 

quantity  of  wealth  within  the  State  escapes  all  burden  of 
taxation,  such  as  wholesale  implement  houses,  moving  pic- 
ture films,  and  private  fortunes  not  represented  by  tangible, 
real  or  personal  property " 

The  Committee  continued: 

''After  a  comparison  of  the  foregoing  figures  your  com- 
mittee has  reached  the  conclusion  that  suitable  legislation 


THE  PROBLEM  11 

should  be  enacted  to  reach  those  business  enterprises  which 
are  shown  herein  to  pay  little  or  no  taxes,  also  that  some 
method  should  be  employed  to  equalize  the  great  dispro- 
portion herein  shown  between  the  value  and  income  of  the 
mining  industry  and  the  hydro-electric  companies  and  the 
value  and  income  of  the  other  principal  industries  of  the 
State." 

Though  the  reports  of  the  legislative  committees  arraigned 
the  inequalities  of  taxation  in  the  state  in  general,  their  emphasis' 
was  clearly  on  the  disproportionate  share  of  taxation  borne  by 
the  large  corporations,  especially  by  the  mining  companies,  and 
by  the  other  industries  of  the  state.  At  any  rate  in  the  minds  of 
the  people  of  the  state,  the  issue  became  crystallized  as1  one 
between  the  large  mining  companies  and  the  small  property  own- 
ers, especially  the  farmers.  In  the  House,  Representative  Dodds 
introduced  a  bill  to  impose  a  tax  of  six  per  cent  on  the  net 
proceeds  of  mines,  and  it  was  s'aid  that  this  proposal  had  the 
approval  of  some  dozen  members  from  the  eastern  part  of  the 
state  who  represented  the  interests  of  the  farmers.  All  radical 
measures  which  had  as  their  purpose  the  imposition  of  heavier 
taxes  on  the  mining  companies',  were  fully  supported  by  the 
Daily  Missoulian,  then  edited  and  published  by  former  Senator 
Joseph  M.  Dixon.  On  the  other  hand,  the  Butte  Miner,  the 
Anaconda  Standard,  and  other  large  dailies  of  the  state,  op- 
posed all  legislation  of  this  character  on  the  ground  that  the 
mining  companies  were  paying  their  full  share.  "From  remarks 
which  have  often  been  dropped  in  Helena  within  the  past  week, ' ' 
wrote  the  Anaconda  Standard  in  an  editorial  of  January  15, 
1917,  "the  natural  inference  would  be  that  mining  companies 
are  at  present  paying  little,  if  any,  taxes,  and  are  not  beginning 
to  bear  their  just  proportion  of  the  cost  of  conducting  the  state 's 

government "     In  reply  to  this  inference,  the  editorial 

asserts  that  the  Anaconda  Company  and  all  other  mining  com- 
panies "are  already  paying  their  fair  and  just  proportion  of 
the  taxes  of  the  state."  In  an  article  entitled  "Sheep  and 
Mines  and  Taxes,"  the  Butte  Post  of  January  15,  1917,  hinted 
at  the  evasion  of  taxes  by  the  agricultural  and  other  interests 
of  the  state.  And  the  Butte  Miner  wrote  in  its  editorial  of  Jan- 
uary 20,  1917,  that  "agitators  have  made  it  a  business  to  go 


12  MINE  TAXATION  IN  MONTANA 

through  the  agricultural  sections  of  the  state  for  years  past 
peddling  misinformation  concerning  this  subject  [i.  e.,  mine 
taxation],"  that  in  reality  the  mining  industry  was  bearing 
"an  extraordinary  tax  ....  not  levied  against  any  other  in- 
dustry in  Montana,"  and  that  "the  miner  has  become  so  ac- 
customed to  paying  his  extra  assessment  that  he  no  longer  thinks 
of  objecting  to  this  discrimination  against  him."  The  Butte 
Miner  warned  the  people  that  there  was  "a  limit  to  the  good 
nature  and  patience"  of  the  miner. 

At  the  same  time  the  Butte  Miner  and  the  Anaconda  Standard 
approved  the  steps  taken  by  the  mine  owners1  and  other  business 
men  to  organize  for  the  purpose  of  opposing  *  *  all  bills  discrim- 
inating against  the  mining  industry  in  the  matter  of  taxation." 
The  newspapers  reported  that  a  state-wide  association  of  mine 
owners,  mine  operators,  leasers,  and  prospectors  had  been  or- 
ganized. The  Committee,  appointed  by  the  association  and  com- 
posed of  leading  mining  men  and  lawyers,  sent  out  circular 
letters  and  telegrams  to  commercial  bodies,  rotary  clubs,  mining 
men,  and  others  "in  related  industries,"  all  over  the  state,  in- 
viting them  to  form  local  branches'  of  the  association  and  to 
"assist  in  the  protest  to  the  legislature  against  the  imposition  of 
the  proposed  special  license  tax."  Mass  meetings  were  held  in 
Butte  and  other  cities  to  arouse  the  people  to  a  realization  that 
this  was1  "a  critical  time  for  the  mining  industry,"  and  special 
speakers  were  sent  to  the  principal  cities  of  the  state  to  create 
sentiment  against  the  proposed  measures  of  mine  taxation.  Mr. 
C.  F.  Kelly,  then  vice-president  of  the  Anaconda  Copper  Mining 
Co.,  Mr.  L.  0.  Evans,  Mr.  Bruce  Kremer,  and  others  appeared 
before  the  joint  session  of  the  Tax  Investigating  Committees  of 
the  Senate  and  House  to  present  the  case  of  the  copper  com- 
panies and  other  corporations. 

The  result  of  all  this  agitation  was  the  defeat  of  the  Dodds 
bill  and  of  other  bills  which  aimed  specifically  at  the  mining 
companies.  To  insure  the  necessary  additional  revenue,  the 
legislature  passed  a  corporation  license  tax  law  imposing  a  tax 
of  one  per  cent  on  the  net  income  of  all  corporations  in  the  state, 
except  those  specifically  exempted.  In  opposing  this  bill,  Mr. 
Ronald  Higgins,  leader  of  the  Republican  minority,  made  the 
following  remarks: 


THE  PROBLEM  13 

"The  question  of  taxation  is  a  burning  issue  in  this  state  at 
the  present  time.  I  think  it  is  incumbent  on  this  Legisla- 
ture to  save  the  mining  interests  in  spite  of  themselves  be- 
cause two  years  from  now  the  people  of  the  state  will  put 

a  tax  on  them  which  will  be  confiscatory We 

know  that  the  mine  representatives  say  that  the  mines  are 
paying  their  share,  but  an  overwhelming  majority  of  the 
people  of  Montana  Jmow  that  the  mines  do  not  pay  their 
just  share " 

The  Fifteenth  Legislature  also  passed  a  law  creating  a  tem- 
porary Tax  and  License  Commission  of  three  members  to  be 
appointed  by  the  Governor  for  the  purpose  of  making  a  thorough 
investigation  of  the  tax  situation  and  of  reporting  to  the  legisla- 
ture in  1919.  During  the  fall  and  winter  of  1917-18,  this  Com- 
mission composed  of  Mr.  C.  R.  Leonard  of  Butte,  Mr.  David 
Hilger  of  Lewistown  and  Mr.  William  Lindsay  of  Carbon  County 
held  several  public  hearings.  But  the  public  interest  in  taxation 
was  maintained  chiefly  by  the  farmers  of  the  state.  The  Montana 
Equity  News,  published  by  the  Montana  Equity  Society,  devoted 
considerable  space  to  articles  on  taxation.  An  article  which  ap- 
peared in  the  issue  of  the  News  for  September  29,  1917,  with 
the  headline  "Fanners  Can't  Dodge  Taxes  in  Montana  Like 
Corporations, ' '  is1  characteristic  of  the  style  and  point  of  view  of 
the  paper.  During  the  annual  convention  of  the  Montana  Equity 
Society  held  at^Great  Falls  in  February,  1918,  an  entire  day  was 
devoted  to  the  subject  of  taxation.  All  references  to  the  in- 
equalities of  taxation  in  the  state,  and  especially  to  the  evasion 
of  taxes  by  the  corporations,  were  met  with  enthusiastic  approval 
by  the  several  hundred  delegates  to  the  convention  and  their 
friends.  To  illustrate  the  spirit  of  the  convention,  it  is  suffi- 
cient to  quote  from  the  speech  delivered  by  Mr.  Carl  W.  Rid- 
dick,  then  assessor  of  Fergus  County  and  now  representative 
in  Congress  from  eastern  Montana.  Said  Mr.  Riddick: 

"Just  as  surely  as  I  stand  before  you  today,  the 
tax  laws  of  Montana  are  going  to  be  revised  by 
the  next  session  of  the  Legislature.  Unless  we  are  on 
the  job,  they  will  not  be  revised  in  the  interests  of  the 

farmers The  mining  interests  wrote  the  tax 

laws  in  an  early  day,  and  they  favored  themselves.  The 
mining  interests  own  two-tenths  of  the  property  of  the  state, 


14  MINE  TAXATION  IN  MONTANA 

and  they  pay  but  one-tenth  of  the  taxes  .  .  .  .  ,  and  the 
only  reason  for  this  is  that  we  sit  idly  by  and  permit  the 
mining  interests  to  run  our  state  house  and  our  Legisla- 
ture.   " 

A  few  weeks  before  the  meeting  of  the  Equity  Society,  a  com- 
mittee of  five  had  been  formed  by  citizens  of  Fergus  County 
for  the  purpose  of  calling  a  state  tax  conference.  This  con- 
ference, the  first  ever  held  in  the  State  of  Montana,  was  called 
at  Lewistown,  and  lasted  three  days  beginning  March  12,  1918. 
The  stormiest  sessions  of  the  conference  were  those  devoted  to 
the  discussion  of  mine  taxation.  The  mining  interests  of  the 
state  were  well  represented.  Mr.  L.  0.  Evans,  chief  counsel  of 
the  Anaconda  Copper  Company,  delivered  an  elaborate  address 
in  which  he  presented  an  array  of  figures  to  prove  that  the 
mines  were  bearing  their  full  share  of  the  tax  burden. 

In  the  spring  of  1918  there  were  rumors  that  the  question  of 
mine  taxation  would  be  the  principal  issue  in  the  fall  campaign. 
It  was  expected  that  the  Non-Partisan  League  would  initiate  a 
bill  amending  the  article  of  the  constitution  on  the  taxation  of 
mines  and  imposing  a  special  tax  on  the  mining  industry.  There 
can  be  no  doubt  that  if  such  a  bill  had  been  initiated,  the  ques- 
tion of  mine  taxation  would  have  been  placed  before  the  voters 
of  Montana  as  the  principal  issue  of  state  politics.  The  Non- 
Partisan  League  did  not  act  upon  the  suggestion  to  initiate  such 
a  bill,  but  the  platform  of  the  League  formulated  two  planks 
on  taxation.  One  was  in  favor  of  exempting  farm  improvements' 
from  taxation;  the  other  demanded  the  "equal  taxation  of  rail- 
roads, mines,  telegraph,  telephone,  electric  light  and  power  com- 
panies, and  all  public  utility  corporations. ' '  The  other  two 
parties,  though  less  specific,  expressed  themselves  in  favor  of 
improving  the  tax  system  of  the  state.  The  plank  on  the  "Re- 
vision of  Montana  Tax  Laws'"  of  the  Republican  party  reads  as 
follows : 

"The  Republican  members  of  the  Legislature  will  give 
most  careful  consideration  to  such  recommendations  as  will 
be  made  by  the  Montana  State  Tax  Commission.  Our  tax 
laws  should  be  revised  to  better  fit  the  present  day  con- 
dition of  Montana,  with  a  view  of  distributing  the  tax  bur- 
den more  equitably  between  all  industries  and  all  people, 


THE  PROBLEM  15 

in  order  that  each  shall  be  required  to  contribute  no  more 
and  no  less  than  a  just  share.  Jealous  care  will  be  exer- 
cised that  large  estates,  large  private  fortunes  and  largest 
vested  interests  shall  contribute  their  full  share  of  the 
revenues  required  to  maintain  our  state  government." 

The   platform   adopted   by   the  Democratic    State    Convention 
was  similar  in  spirit.    It  read  in  part: 

"Awaiting  the  report  and  recommendations  of  the  tax 
commission  created  by  the  last  legislative  session  with  con- 
fidence that  it  will  point  a  way  for  more  equal  distribution 
of  tax  burdens  within  the  state,  the  Democratic  members 
of  the  Legislature  are  pledged  to  legislation  or  constitutional 
amendment  to  carry  out  such  recommendations  as  will 
bring  about  equal  taxation  of  mines,  public  utilities,  farms, 
and  all  other  classes  of  property." 

The  historical  survey  sketched  in  the  preceding  pages  shows 
clearly  that  for  at  least  a  decade  the  necessity  of  reforming  the 
tax  system  of  the  state  has1  been  fully  recognized.  Nevertheless, 
with  the  exception  of  an  amendment  increasing  the  powers  of 
the  State  Board  of  Equalization,  little  has  been  done  in  the 
matter.  There  has  been  too  much  politics  in  the  handling  of 
taxation  in  Montana,  and  too  much  fear,  on  the  part  of  corpora- 
tions and  of  individuals,  of  frank  and  scientific  discussion  of  tax 
problems.  As  a  result,  the  problem  of  taxation  is1  still  before  the 
people  of  the  state  in  its  most  rudimentary  form.  It  is  still  a 
question  of  eliminating  gross  inequalities  as  between  counties 
and  between  classes  of  property.  There  are  s'everal  phases  of 
the  problem  which  must  be  clearly  distinguished.  There  are  in- 
equalities of  taxation  in  Montana  with  which  other  states  have 
wrestled  in  the  past  and  are  wrestling  still.  Such  inequalities 
are  inherent  in  the  system  of  the  general  property  tax  and  can 
be  eliminated  to  some  extent  only  by  modifications'  in  that  sys- 
tem. There  are  other  inequalities  which  are  the  result  of  an 
inadequate  tax  administration.  They  can  and  should  be  rem- 
edied by  reforms  in  methods  of  assessment  and  by  the  establish- 
ment of  a  permanent  tax  commission  with  adequate  powers  of 
supervision  and  control.  But  Montana  suffers  also  from  in- 
equalities of  taxation  between  classes  of  property  and  industries 
which  are  the  result  of  antiquated  or  one-sided  laws.  The  method 


16  MINE  TAXATION  IN  MONTANA 

of  taxing  corporations  in  Montana  was  adopted  about  thirty 
years  ago.  While  most  states'  in  the  country  have  studied  the 
problem  of  corporate  taxation  and  have  made  necessary  changes 
in  their  laws,  Montana  has  held  on  to  the  past.  The  problems 
arising  out  of  this  situation  are  the  most  serious  and  complex 
ones. 

The  number  of  corporations'  in  Montana  is  large,  and  they 
cover  the  entire  field  of  industry,  trade,  and  finance.  To  devise 
an  adequate  system  of  corporate  taxation  will  require  the  best 
efforts  of  a  permanent  tax  commission  for  a  considerable  time. 
But  there  is  one  phase  of  corporate  taxation  which  is  of  imme- 
diate interest  in  Montana.  That  is  the  taxation  of  mines.  Rightly 
or  wrongly,  there  is  a  wide-spread  impression  throughout  the 
state  that  the  mining  industry  has  not  paid  and  is  not  now 
paying  its  proper  share  of  taxes.  This  impression  is  the  cause  of 
the  feeling  prevalent  throughout  the  state  that  the  small  farmer, 
or  business  man,  is  the  victim  of  injustice  sanctioned  by  the  con- 
stitution and  laws  of  the  state.  This  feeling  is  responsible  for 
the  recurrent  outbursts  against  the  mining  companies  and  for 
the  periodical  attempts  to  tax  the  mines  in  some  special  and 
drastic  way.  It  is'  also  the  cause  of  much  of  the  political  ferment 
in  the  state  and  of  the  friction  between  the  farmers  and  other 
groups  of  the  population. 

The  keen  feeling  on  the  subject  notwithstanding,  there  is  very 
little  exact  understanding  of  the  problem  in  the  state.  Discus- 
sion on  both  sides  has  been  partisan  and  has  generated  much 
heat,  s'hedding  little,  if  any,  light.  Representatives  of  the  mining 
companies  have  been  inclined  to  pile  up  arrays  of  figures  and  to 
present  impressive  statistics  of  taxes  paid  by  their  companies. 
The  opponents  of  the  mining  companies,  on  the  other  hand,  have 
pointed  an  accusing  finger  at  the  large  profits  made  by  the 
mining  companies  from  year  to  year.  Both  sides  have  permitted 
temporary  partisan  considerations  to  overshadow  the  real  prob- 
lems involved. 

The  supreme  task,  therefore,  is  to  spread  enlightenment  on 
the  subject  and  to  place  within  reach  of  all  the  true  facts  and 
the  generally  recognized  principles  which  are  involved  in  the 
issue.  The  presentation  of  such  facts  and  principles'  is  attempted 
in  the  following  pages.  It  is  an  effort  to  contribute  to  the  in- 


THE  PROBLEM  17 

telligent  discussion  of  the  problem  in  the  state.  The  author  has 
the  sincere  hope  that  this  study  may  help  to  form  an  enlightened 
public  opinion  on  the  subject  and  thereby  to  advance  the  solution 
of  one  of  the  most  difficult  problems  of  the  state. 


CHAPTER  II. 
How  THE  MINES  ARE  TAXED. 

The  method  of  mine  taxation  which  is  in  force  in  the  state  of 
Montana  is  known  as  the  "net  proceeds"  method.  The  so-called 
net  proceeds  of  the  mines  are  taxed  as  personal  property.  In  ad- 
dition, the  surface  of  the  mines  and  the  improvements  are  taxed 
to  a  limited  extent.  This  method  is  provided  for  in  Section  3 
of  Article  12  of  the  Constitution.  Sections  2563  to  2571  in- 
clusive of  the  Revised  Codes  of  1907  merely  lay  down  the  reg- 
ulations by  means  of  which  the  purpose  and  provisions  of  the 
Constitution  may  be  carried  out.  In  the  following  pages  the 
provisions  of  the  Constitution  and  of  the  statutes  are  summarized 
in  a  non-technical  way. 

The  assessment  of  mines'  is  under  the  jurisdiction  of  the  local 
assessor.  The  assessor  of  each  county  is  responsible  for  the  as- 
sessment of  all  the  mines  within  his  county,  and  makes  the 
assessment  in  accordance  with  the  law.  The  State  Board  of 
Equalization  furnishes  to  every  local  assessor  a  special  book 
called  the  "Assessment  List  of  the  Net  Proceeds  of  Mines."  This 
book  specifies  the  questions  which  are  to  be  answered  by  the 
owners  of  mines  and  which  are  required  by  statute.  In  this  way 
the  assessment  of  mines  is  made  uniform  throughout  the  state. 
According  to  the  reports  of  the  Geological  Surve3r,  there  are  at 
least  twenty  counties  in  Montana  in  which  mining  operations  are 
carried  on.  There  are  thus  twenty  county  assessors  upon  whom 
it  devolves  to  make  an  assessment  of  the  mines  within  their 
counties.  Each  one  of  these  twenty  county  assessors'  is  guided 
in  the  performance  of  his  duties  by  the  form  of  the  assessment 
book  prepared  by  the  State  Board  of  Equalization.  But  aside 
from  this,  the  local  assessor  is  entirely  independent  in  the  per- 
formance of  his  task. 

It  is  the  duty  of  the  county  assessor  to  obtain  a  statement  from 
every  person,  corporation,  or  association  engaged  in  mining  in 
his  county.  The  statement  must  be  made  out  annually  between 

18 


HOW  THE  MINES  ARE  TAXED  19 

the  first  and  tenth  day  of  June  for  the  year  preceding  the  first 
day  in  June.  The  statement  must  be  verified  by  the  oath  of  the 
owner,  or  of  the  superintendent  or  manager,  of  the  mine  or 
mining  corporation.  The  owner  or  managing  agent  is  required 
by  law  to  deliver  the  statement  to  the  assessor  of  the  county  in 
which  the  mine  or  mines  are  situated. 

Each  statement  made  by  the  owner  or  managing  agent  of  the 
mine  must  contain  the  name  of  the  owner  of  the  mine  and  a 
description  of  the  mine  and  of  its  location.  This  description  in- 
cludes a  statement  of  the  number  of  acres  which  the  surface  of 
the  mine  occupies.  The  Constitution  provides  that  such  surface 
should  be  taxed  "at  the  price  paid  the  United  States  therefor." 
This  means'  five  dollars  per  acre  for  quartz  mines,  and  two  and 
a  half  dollars  per  acre  for  placer  claims.  This  valuation  is  a 
fixed  one,  regardless  of  the  value  of  the  mine. 

However,  in  case  "the  surface  ground,  or  some  part  there- 
of, of  such  mine  or  claim  is  us'ed  for  other  than  mining 
purposes,  then  said  surface  ground,  or  any  part  thereof,  so 
used  for  other  than  mining  purposes,  shall  be  taxed  at  its 
value  for  such  other  purposes,  as  provided  by  law."  The 
meaning  of  this  provision  is  clear.  In  case  the  surface  of 
a  mining  claim  is  used  as  any  other  piece  of  ground  for  the 
erection  of  dwellings'  or  stores  or  factories  or  other  buildings  not 
used  for  mining,  then  that  surface  acquires  a  value  which  is 
entirely  independent  of  mining.  It  is  then  no  longer  a  mining 
claim.  It  is  real  estate  and  must  be  taxed  as  such.  The  im- 
portance of  this  provision  may  be  grasped  when  it  is  remem- 
bered that  a  very  large  part  of  the  city  of  Butte  is  built  upon 
the  surface  of  mining  claims'.  To  tax  such  land  at  the  price  of 
mining  claims,  that  is  at  five  or  two  and  a  half  dollars  per  acre, 
would  be  preposterous.  But  when  such  surface  ground  is  taxed 
at  the  value  acquired  by  its  use  for  other  than  mining  purposes, 
such  taxation  has  no  relation  to  the  mine.  If  an  owner  of  a 
mine  uses'  several  acres  of  the  surface  ground  of  his  mine  to 
build  homes  for  his  workers  or  a  store  or  a  hotel,  such  surface 
ground  is  put  to  a  use  which  has  a  value  of  its  own  and  is  in  no 
relation  to  his  mine  for  purposes  of  taxation.  Taxes  paid  on 


20  MINE  TAXATION  IN  MONTANA 

such  surface  ground  cannot  be  credited  to  the  mine.  In  so  far  as 
the  claim  is  used  exclusively  for  mining  purposes,  the  rate  of 
taxation  remains  five  or  two  and  a  half  dollars  per  acre,  or  "the 
price  paid  the  United  States  therefor." 

Besides  the  tax  on  the  surface  ground,  the  owners  of  mines 
are  also  assessed  for  ''all  machinery  used  in  mining,  and  all 
property  and  surface  improvements  upon  or  appurtenant  to 
mines  and  mining  claims  which  have  a  value  separate  and  inde- 
pendent of  such  mines  or  mining  claims. "  Such  is  the  provision  of 
the  Constitution  which  is  also  embodied  in  Section  2500  of  the  Re- 
vised Codes  of  1907.  Section  2570  of  the  Revised  Codes  makes  this 
provision  more  emphatic  by  declaring  that ' '  nothing  in  this  chap- 
ter contained  must  be  construed  so  as  to  exempt  from  taxation  the 
improvements,  buildings,  erections,  structures,  or  machinery 
placed  upon  any  mining  claim,  or  used  in  connection  therewith,  or 
supplies  used  either  in  the  mills,  reduction  works  or  mines.'* 
This  means  that  machinery,  such  as  compressed  air  turbines, 
engines1,  etc.,  is  assessed  as  machinery  in  factories  would  be ;  that 
supplies,  such  as  powder,  dynamite,  timber,  etc.,  are  assessed  as 
merchandise  and  supplies  would  be  in  any  other  business;  and 
that  buildings1,  such  as  office  buildings,  power  houses,  smelters, 
accommodations  for  workers,  etc.,  are  assessed  as  improvements 
in  accordance  with  the  value  they  would  have  apart  from  mining 
operations.  All  such  supplies  and  buildings  and  machinery,  to- 
gether with  the  surface  ground,  make  up  the  real  and  personal 
property  for  which  the  mining  industry  is  assessed,  outside  the 
net  proceeds  of  the  mines. 

The  net  proceeds  form  the  most  important  item  in  the  assess- 
ment of  the  mining  industry  in  Montana.  The  Constitution  does 
not  specify  how  the  net  proceeds  should  be  taxed.  The  Constitu- 
tion merely  provides1  that  "the  annual  net  proceeds  of  all  mines 
and  mining  claims  shall  be  taxed  as  provided  by  law."  The 
method  of  taxing  the  net  proceeds  is  laid  down  in  the  Statute 
(Section  2500  of  the  Revised  Codes  of  1907)  which  provides  that 
"the  annual  net  proceeds  of  all  mines  and  mining  claims  shall  be 
taxed  as  other  personal  property."  This  means  that  the  rate 
of  taxation  applied  to  personal  property  in  the  county  and  in 
the  state  is  imposed  also  upon  the  net  proceeds  of  the  mines. 


HOW  THE  MINES  ARE  TAXED  21 

The  net  proceeds  are  regarded  for  purposes  of  taxation  as  per- 
sonal property. 

The  statute  also  specifies  the  method  of  determining  the  net 
proceeds  of  a  mine.  "The  Assessment  Book,"  prepared  by  the 
State  Board  of  Equalization  and  used  by  the  county  assessor, 
contains  special  columns  with  headings  for  such  data  as  should 
help  the  assessor  to  determine  the  net  proceeds.  The  owner  or 
manager  of  the  mine  is  required  to  state  the  total  number  of 
tons  of  ore  extracted  during  the  year  and  the  gross  yield  or 
value  in  dollars  and  cents  per  ton  of  the  ore.  These  two  items 
furnish  the  gross  value  of  all  the  ore  extracted  during  the  year. 
From  this  gross  value  certain  expenditures  are  deducted:  first, 
the  cost  of  extracting  the  ore  from  the  mines;  secondly,  the 
cost  of  transporting  the  ore  and  mineral  to  the  mill  or  reduction 
works;  thirdly,  the  cost  of  reducing  the  ore  and  of  converting 
it  into  money.  The  expenditures  allowed  for  deduction  include 
all  money  expended  for  labor,  machinery,  and  supplies  needed 
and  used  for  mining  operations,  for  transportation,  for  reduction, 
and  for  the  "extraction  of  the  metals  and  minerals."  They 
also  include  all  moneys  expended  during  the  year  for  improve- 
ments in  and  about  the  mine,  and  for  the  construction  of  mills 
and  reduction  works  used  and  operated  in  connection  with  the 
mine.  The  only  items  of  expenditure  incurred  during  the  year 
which  are  not  to  be  deducted  from  the  gross  value  are  ' '  the  sal- 
aries or  any  portion  thereof,  of  any  persons  or  officers  not 
actually  engaged  in  the  working  of  the  mine  or  personally  su- 
perintending the  management  thereof."  The  net  proceeds  are 
thus  derived  by  subtracting  from  the  gross  value  of  the  ore 
extracted  during  the  year  the  cost  of  extracting,  reducing, 
refining,  and  selling  the  ore,  and  the  cost  of  improvements  made 
during  the  year,  with  the  exception  of  such  salaries  as  are  paid 
to  persons  not  actually  engaged  in  the  working  or  superintend- 
ing of  the  mine. 

It  is  clear  that  the  preparation  of  the  statement  of  the  net 
proceeds  of  a  mine  is  a  complex  process.  Experience  in  many 
states  has  shown  that  the  amount  of  net  proceeds  may  be  mate- 
rially reduced  either  by  understating  the  gross  value  or  by 
including  improper  items  of  expenditure.  The  statute  gives 
the  county  assessor  the  right  "at  any  time  to  exam- 


22  MINE  TAXATION  IN  MONTANA 

ine  the  books  and  accounts  of  any  person,  corporation, 
or  association  engaged  in  mining  in  order  to  verify  the 
statement  made  by  such  person,  corporation,  or  association, 
and  if  from  such  examination,  he  finds  such  statement  false, 
he  must  assess  the  net  proceeds  in  the  same  manner 
as  if  no  statement  had  been  made  or  delivered."  That 
is,  the  assessor  must  list  and  assess  the  property,  according 
to  his  knowledge  and  information.  In  practice,  however,  the  as- 
sessors' seldom,  if  ever,  avail  themselves  of  this  right.  As  a  rule 
they  merely  receive  and  record  the  statements'  prepared  for  them 
by  the  mine  owners  or  mining  companies. 

Such  is  the  law  by  which  the  assessment  and  taxation  of  the 
mining  industry  is  regulated  in  the  state  of  Montana.  For  those 
who  wish  to  familiarize  themselves  with  the  wording  of  the  law 
the  article  of  the  Constitution  and  the  sections  of  the  Code  re- 
lating to  the  taxation  of  mines  are  reproduced. 

Constitution  :     Article  XII,  sec.  3 : 

All  mines  and  mining  claims,  both  placer  and  rock  in 
place,  containing  or  bearing  gold,  silver,  copper,  lead,  coal, 
or  other  valuable  mineral  deposits,  after  purchase  thereof 
from  the  United  States,  shall  be  taxed  at  the  price  paid  the 
United  States  therefor,  unless  the  surface  ground,  or  some 
part  thereof,  of  such  mine  or  claim  is  used  for  other  than 
mining  purposes,  and  has  a  separate  and  independent  value 
for  such  other  purposes,  in  which  case  said  surface  ground, 
or  any  part  thereof,  so  used  for  other  than  mining  purposes, 
shall  be  taxed  at  its  value  for  such  other  purposes,  as  pro- 
vided by  law ;  and  all  machinery  used  in  mining,  and  all 
property  and  surface  improvements  upon  or  appurtenant  to 
mines  and  mining  claims  which  have  a  value  separate  and 
independent  of  such  mines  or  mining  claims,  and  the  annual 
net  proceeds  of  all  mines  and  mining  claims  shall  be  taxed 
as  provided  by  law. 

Section  2500.    Taxation  of  Mines  : 

All  mines  and  mining  claims,  both  placer  and  rock  in 
place,  containing  or  bearing  gold,  silver,  copper,  lead,  coal 
or  other  valuable  mineral  deposits,  after  purchase  thereof 
from  the  United  States,  shall  be  taxed  at  the  price  paid  the 
United  States  therefor,  unless  the  surface  ground,  or  some 
part  thereof,  of  such  mine  or  claim  is  used  for  other  than 
mining  purposes,  and  has  a  separate  and  independent  value 
for  such  other  purposes,  in  which  case  said  surface  ground, 


HOW  THE  MINES  ARE  TAXED  23 

or  any  part  thereof,  so  used  for  other  than  mining  purposes 
shall  be  taxed  at  its  full  value  for  such  other  purposes; 
and  all  machinery  used  in  mining  and  all  property  and  sur- 
face improvements  upon  or  appurtenant  to  mines  and  min- 
ing claims  which  have  a  value  separate  and  independent 
of  such  mines  or  mining  claims,  and  the  annual  net  pro- 
ceeds of  all  mines  and  mining  claims  shall  be  taxed  as 
other  personal  property. 


ASSESSMENT  OF  NET  PROCEEDS  OP  MINES. 

Section  2563.  Owners  of  mines  must  make  statement. 

Section  2564.  Statement,  what  to  contain. 

Section  2565.  What  deductions  are  to  be  made. 

Section  2566.  Assessment    book    of    the    net    proceeds    of 

mines,  what  to  contain. 

Section  2567.  Duties  of  the  assessor  and  other  officers. 

Section  2568.  Failure  to  make  statement ;  duty  of  assessor. 

Section  2569.  Right  of  assessor  to  examine  books,  etc. 

Section  2570.  Improvements,  etc.,  not  exempt. 

Section  2571.  Tax,  how  collected,  and  tax  a  lien. 


2563.     (#3760)     Owners  of  mines  must  make  statement. 


Every  person,  corporation  or  association  engaged  in  min- 
ing upon  any  quartz  vein  or  lode,  or  placer  mining  claim, 
containing  gold,  silver,  copper,  coal,  lead  or  other  valuable 
mineral  deposits,  must,  between  the  first  and  tenth  days  of 
June  in  each  year,  make  out  a  statement  of  the  gross  yield 
of  the  above  named  metals  or  minerals  from  each  mine 
owned  or  worked  by  such  persons,  corporation  or  association 
during  the  year  preceding  the  first  day  of  June,  and  the 
value  thereof.  Such  statement  must  be  verified  by  the  oath  of 
such  person,  or  the  superintendent  or  managing  agent  of 
such  corporation  or  association,  who  must  deliver  the  same 
to  the  assessor  of  the  county  in  which  such  mine  or  mines 
are  situated. 


2564.     (#3761)     Statement,  what  to  contain. 


The  statement  mentioned  in  the  preceding  section  must 
contain  a  true  and  correct  account  of  the  actual  expendi- 
tures of  money  and  labor  in  and  about  extracting  the  ore 
and  mineral  from  the  mine  and  transporting  the  same  to 
the  mill  or  reducing  works  and  the  reduction  of  the  ore  and 
the  conversion  of  the  same  into  money,  or  its  equivalent, 
during  the  year. 


24  MINE  TAXATION  IN  MONTANA 


2565.     (#3762)     What  deductions  are  to  be  made. 


In  making  the  statement  of  the  expenditures  mentioned 
in  the  preceding  section,  tjiere  must  be  allowed  all  moneys 
expended  for  necessary  labor,  machinery  and  supplies  need- 
ed and  used  in  the  mining  operation,  for  improvements  nec- 
essary in  and  about  the  working  of  the  mine,  for  reducing 
the  ores,  for  the  construction  of  mills  and  reduction  works 
used  and  operated  in  connection  with  the  mine,  for  trans- 
porting the  ore  and  for  extracting  the  metals  and  minerals 
therefrom;  but  money  invested  in  the  mines  or  improve- 
ments during  any  year  except  the  year  immediately  pre- 
ceding the  statement,  must  not  be  included  therein.  Such 
expenditures  do  not  include  the  salaries,  or  any  portion 
thereof,  of  any  persons  or  officers  not  actually  engaged  in 
the  working  of  the  mine,  or  personally  superintending  the 
management  thereof. 

2566.  (#3763)     Assessment  book  of  the  net  proceeds  of  mines, 
what  to  contain 

The  assessor  must  prepare,  at  the  same  time  he  prepares 
the  general  assessment  book,  another  assessment  book, 
called  "The  Assessment  Book  of  the  Net  Proceeds  of  the 
Mines"  alphabetically  arranged,  unless  otherwise  directed 
by  the  State  Board  of  Equalization,  in  which  must  be  listed 
the  net  proceeds  of  all  the  mines  in  his  county,  and  in 
which  must  be  specified,  in  separate  columns  and  under  the 
appropriate  head : 

1.  The  name  of  the  owner  of  the  mine. 

2.  Description  and  location  of  the  mine. 

3.  Number  of  tons  extracted  during  the  year. 

4.  Gross  yield  or  value  in  dollars  and  cents. 

5.  Actual  cost  of  extracting  same  from  mine. 

6.  Actual  cost  of  transportation  to  place  of  reduction 
or  sale. 

7.  Actual  cost  of  reduction  or  sale. 

8.  Cost  of  construction  and  repair  of  mines  and  reduc- 
tion works  during  the  year. 

9.  Net  proceeds,  or  value  in  dollars. 
10.     Total  amount  of  tax. 

2567.  (#3764)     Duties  of  the  assessor  and  other  officers 

The  duties  of  the  assessor,  county  clerk,  state  board  of 
equalization,  and  board  of  county  commissioners,  as  to  the 
assessment  of  the  net  proceeds  of  mines,  the  statements 
and  returns  to  be  made,  the  equalization  thereof,  and  other 


HOW  THE  MINES  ARE  TAXED  25 

official  acts,  are  the  same  as  those  mentioned  in  Chapter  III 
of  this  title,  in  regard  to  the  assessment  of  other  property. 

2568.  (#3765)     Failure  to  make  a   statement;   duty  of  asses- 
sor  

If  any  person,  corporation,  or  association  engaged  in 
mining  as  mentioned  in  this  chapter,  refuses  or  neglects  to 
make  and  deliver  to  the  assessor  of  the  county  where  the 
mines  are  located,  the  statement  mentioned  in  this  chapter, 
such  assessor  must  list  the  property  and  assess,  according 
to  his  knowledge  and  information,  the  amount  of  such  tax 
in  the  manner  provided  by  law  for  the  assessment  of  other 
property  where  no  statement  is  furnished. 

2569.  (#3766).    Right  of  assessor  to  examine  books,  etc 

The  assessor,  at  any  time,  has  the  right  to  examine  the 
books  and  accounts  of  any  person,  corporation  or  association 
engaged  in  mining,  as  mentioned  in  this  chapter,  in  order 
to  verify  the  statement  made  by  such  person,  corporation, 
or  association,  and  if  from  such  examination,  he  finds  such 
statement  false,  he  must  assess  the  net  proceeds  in  the  same 
manner  as  if  no  statement  had  been  made  and  delivered. 


2570.     (#3767)     Improvements,  etc.,  not  exempt. 


Nothing  in  this  chapter  contained  must  be  construed  so  as 
to  exempt  from  taxation  the  improvements,  buildings,  erec- 
tions, structures,  or  machinery  placed  upon  any  mining 
claim,  or  used  in  connection  therewith,  or  supplies  used 
either  in  the  mills,  reduction  works  or  mines. 


2571.     (#3768)     Tax,  how  collected,  and  tax  a  lien. 


The  tax  mentioned  in  the  preceding  sections  must  be 
collected  and  the  payment  thereof  enforced  as  the  collection 
and  enforcement  of  other  taxes  are  provided  for,  and  every 
such  tax  is  a  lien  upon  the  mines  or  mining  claims  from 
which  the  ores  and  minerals  are  extracted,  which  lien  at- 
taches on  the  first  Monday  of  March  in  each  year,  and  the 
sale  thereof  for  delinquent  taxes  may  be  made  as  provided 
for  the  sale  of  real  estate  for  delinquent  taxes. 


CHAPTER  III. 

Do  THE  MINES  BEAR  AN  ADDITIONAL  BURDEN  OF  TAXATION? 

The  method  of  taxing  mines  described  in  the  preceding  chapter 
has  given  rise  to  two  views  on  the  subject.  One  is  that  the  mines' 
of  the  state  are  especially  favored  by  the  law  in  comparison  with 
other  forms  of  property.  The  other  is  that  the  mining  industry 
has  from  the  very  beginning  been  singled  out  by  the  law  for 
revenue  purposes  and  that  it  has  been  made  to  bear,  and  does 
still  bear,  an  additional  burden  of  taxation,  as  compared  with 
other  classes  of  property  in  the  state. 

The  latter  view  was  ably  presented  by  Mr.  C.  F.  Kelly,  vice- 
president  of  the  Anaconda  Copper  Company,  in  an  address  de- 
livered before  the  Joint  Legislative  Committees  on  tax  investiga- 
tion on  January  18,  1917,  and  since  republished  in  pamphlet 
form  under  the  title  of  Mining  Taxation  in  Montana,.  In  that 
address  Mr.  Kelly  claimed  that  ' i  so  far  from  having  in  mind  the 
proposition  of  exempting  mines  from  taxation,  the  purpose,  on 
the  contrary,  was  to  impose  additional  burdens  of  taxation  upon 
mines  over  and  above  that  imposed  upon  any  other  form  or 
species  of  land."  Mr.  Kelly  asserted  that  such  was  the  evident 
intention  of  the  law,  because  in  addition  to  taxes  on  the  surface 
of  mines  and  on  improvements  and  machinery,  the  law  imposes 
a  special  tax  on  the  net  proceeds  of  mines.  Mr.  Kelly's  argu- 
ment may  be  best  summarized  by  the  following  quotations  from 
his  address: 


"So  far  as  the  surface  of  mining  property  is  concerned, 
it  is  precisely  in  the  same  situation  as  is  any  other  real  es- 
tate, taxed  at  a  price  commensurate  with  its  value  for  pur- 
poses incidental  to  the  working  of  the  mine.  .  .  .  Beyond 
the  surface  ....  every  dollar's  worth  of  property  that 
is  placed  upon  the  surface  of  a  mining  claim,  whether  it  is 
machinery,  a  mining  improvement,  a  building,  or  what  not, 
is  under  the  law  taxable  as  is  all  of  the  property  in  the 
state.  Now  [and  this  is  Mr.  Kelley's  most  significant 
statement]  I  submit  as  a  fundamental  proposition  that  when 

26 


DO  MINES  BEAR  ADDITIONAL  BURDEN          27 

you  have  taxed  the  surface  of  a  mining  claim  at  its  full 
value  for  the  purpose  for  which  it  is  used,  or  is  capable  of 
being  used,  and  when  you  have  taxed  the  improvements  that 
have  been  made  upon  that  surface,  you  have  gone  as  far  in 
the  matter  of  taxation  as  the  law  reaches  any  other  class 
of  property  in  this  state."  1 

From  this  point  of  view,  the  tax  upon  net  proceeds,  which  is1 
levied  in  addition  to  the  taxes  on  the  surface  and  the  improve- 
ments, is  a  special  tax  imposed  upon  mines  only  and  not  levied 
upon  crops  or  any  other  form  of  property,  and  therefore  repre- 
sents an  additional  burden  upon  the  mining  industry  of  the  state. 
Mr.  Kelly  explains  this  discrimination  against  mining  property 
in  Montana  by  the  fact  that  the  mines  were  originally  the  only 
source  of  revenue  in  the  state  and  had  to  be  drawn  upon  to  fur- 
nish the  necessary  means  of  government.  Writes  Mr.  Kelly: 

"It  never  occurred  to  the  framers  of  the  constitu- 
tion that  they  were  putting  mines  in  a  specially 

favored    class On    the    contrary,    they 

were  taxing  what  was  then  the  valuable  property  in  the 
state  of  Montana, — the  only  property  which  furnished  a 
source  of  revenue,  and  constructing  a  revenue  measure,  they 
penalized  it  to  the  extent  of  making  it  primarily  responsible 
for  the  burdens  of  government."  2 

To  prove  that  his  view  is  the  true  interpretation  of  the  law, 
Mr.  Kelly  quotes  from  the  decision  of  the  Supreme  Court  in 
the  case  of  the  Northern  Pacific  Railway  Company  versus  Mjeld, 
48  Montana,  page  287  at  page  296.  The  important  sentence  in 
this  decision,  which  Mr.  Kelly  italicizes,  is  as'  follows : 

"The  problem  before  the  constitutional  convention  was, 
not  how  to  exempt  mining  property  from  taxation,  but 
rather  how  to  compel  it  to  respond  to  the  reasonable  de- 
mands of  the  state  for  revenue  and  at  the  same  time  protect 
it  against  such  exactions  as  would  or  might  discourage 
prospecting  or  development." 

Upon  the  basis  of  this  quotation  and  of  his  general  interpreta- 
tion of  the  law,  Mr.  Kelly  reaches  the  following  conclusion : 

1  C.  F.  Kelly,  Mining  Taxation  in  Montana,  pp.  9-10. 
2  Ibidem,  pp.  10-13. 


28  MINE  TAXATION  IN  MONTANA 

"Upon  the  successful  mining  venture  there  was  levied,  in 
addition  to  the  taxes  which  all  other  property  bears,  a  net 

proceeds  tax in  other  words  a  license  tax 

so  that  today,  and  every  day  since  the  formation  of  the 
constitution  of  this  state,  the  mining  industry  is,  and  has 
been,  the  only  great  industry  of  the  state,  which  has  been 
upon  a  substantial  license  basis."  * 

Such  is  the  argument  of  those  who  claim  that  the  mining  in- 
dustry in  the  State  of  Montana  not  only  bears,  and  always  has 
borne,  its  share  of  taxes,  but  more  than  its  share.  According 
to  the  newspapers  of  the  state,  Mr.  Kelly's  address  made  a  pro- 
found impression  upon  the  members  of  the  legislative  committee 
and  influenced  subsequent  legislation.  The  argument  was  re- 
peated by  Mr.  L.  O.  Evans,  counsel  for  the  Anaconda  Copper 
Company,  at  the  State  Tax  Conference  held  at  Lewistown  March 
12-14,  1918.  This  argument  may,  therefore,  be  considered  as  the 
best  and  strongest  expression  of  those  who  believe  that  the  mines 
of  the  state  bear  an  extra  burden  of  taxation.  The  men  quoted 
above  are  undoubtedly,  by  their  position  and  legal  training,  the 
best  qualified  and  most  authentic  spokesmen  of  the  mining  in- 
terests' in  the  state. 

Nevertheless,  it  cannot  be  too  strongly  emphasized  that  their 
argument  is  completely  at  variance  with  the  generally  recognized 
principles  and  methods  of  taxation.  The  fallacy  of  the  argu- 
ment is  evident  as  soon  as  one  analyzes  the  purpose  of  taxation 
and  the  methods  by  which  our  public  revenue  is  raised.  Mr. 
Kelly,  in  his1  address  quoted  above,  realized  that  it  was  essential 
to  examine  his  general  statements  in  the  light  of  fundamental 
principles.  In  two  places  in  his  address,  he  made  an  attempt  to 
do  so.  These  passages  of  his  address  are  interesting  and  intro- 
duce us  to  the  heart  of  the  problem.  Said  Mr.  Kelly : 

"It  is  a  basic  principle  of  all  government  that 
as  each  citizen  enjoys  the  benefits  derived  from 
becoming  a  constituent  member  of  the  state  in  the  pro- 
tection of  his  life,  his  liberty  and  his  property,  so  also 
should  each  citizen  of  the  state  contribute  proportionately 
to  the  support  and  maintenance  of  that  government.  Upon 
this  principle  is  founded  all  justice  in  taxation " 

1  Ibidem,  PP-  10-13. 


DO  MINES  BEAR  ADDITIONAL  BURDEN          29 

And  further: 

"An  authority  whose  word  is  final  has  defined  taxes  as 
'the  enforced  proportional  contributions  from  persons  and 
property  levied  by  the  state  by  virtue  of  its  sovereignty 
for  the  support  of  government  and  for  all  public  needs/ 
I  wish  to  emphasize  the  word  'proportional,'  for  the  pillar 
upon  which  the  entire  superstructure  rests  is  the  funda- 
mental requirement  that  taxes  shall  be  levied  by  some  rule 
of  proportion  which  is  intended  to  insure  uniformity  of  con- 
tribution and  a  just  apportionment  of  the  burdens  of  gov- 
ernment." x 

Such  are  the  principles  which  Mr.  Kelly  cites  in  substantiation 
of  his  general  argument.  One  may  accept  the  definition  of  a 
tax  quoted  by  Mr.  Kelly.  One  may  also  agree  with  Mr.  Kelly 
in  laying  the  emphasis  on  the  word  "  proportional. "  The  ques- 
tion, however,  is,  what  is  "the  rule  of  proportion"  by  which 
taxes  should  be  levied.  Mr.  Kelly  has  nothing  more  to  say  on  the 
subject  throughout  his  address.  From  the  passages  quoted  above 
it  would  seem  that,  in  his  view,  each  citizen  should  pay  in  pro- 
portion to  "the  benefits  derived  from  becoming  a  constituent 
member  of  the  state  in  the  protection  of  his  life,  his  liberty  and 
his  property. " 

If  this  is  correct,  Mr.  Kelly  holds  what  is  known  as  "the  ben- 
efit theory  of  taxation,"  that  is,  the  view  that  each  citizen  should 
pay  taxes1  in  proportion  to  the  benefits  derived  by  him  from 
government.  There  are  many  "authorities"  who  could  be  quoted 
in  support  of  this  view.  However,  their  word  is  not  "final." 
The  whole  trend  of  thought  in  public  finance  has  been  away  from 
the  "benefit  theory"  in  the  direction  of  the  "faculty  theory." 
The  "benefit  theory"  has  been  abandoned  by  most  students  of 
public  finance  because  of  its  inherent  difficulties  and  contradic- 
tions. It  is  impossible  to  measure  the  advantages1  conferred  upon 
any  one  individual  by  any  of  the  activities  of  the  state.  Many 
of  the  most  essential  functions  of  the  state,  such  as  education, 
sanitation,  etc.,  are  of  the  greatest  benefit  to  those  who  are 
least  able  to  pay  for  them.  In  general,  the  "benefit  theory"  is 
based  upon  an  individualistic  conception  of  government  which 

1  Ibidem,  PP.  5-6. 


30  MINE  TAXATION  IN  MONTANA 

has  become  entirely  inadequate  under  the  new  conditions  of  our 
social  life. 

The  ' 'faculty  theory  of  taxation"  is  based  on  the  idea  that 
all  members  of  society  have  common  interests  for  the  realization 
of  which  they  must  contribute  in  proportion  to  their  ability  to 
pay.  Adam  Smith  long  ago  expressed  the  idea  that  "the  sub- 
jects of  every  state  ought  to  contribute  towards1  the  support  of 
the  government  as  nearly  as  possible  in  proportion  to  their 
respective  abilities. ' '  At  the  present  time,  the  weight  of  authori- 
tative opinion  in  the  field  of  public  finance  is  on  the  side  of  the 
"faculty"  or  "ability"  theory.  It  is  recognized  as  being  in 
greater  harmony  with  the  modern  conception  of  the  state,  with 
the  interests  of  society,  and  with  the  ethics1  of  Christianity. 

But  aside  from  theories,  the  idea  that  all  persons  should  pay 
taxes  in  proportion  to  their  ability  is  at  the  basis  of  the  tax 
system  prevailing  in  the  United  States.  As  is  well  known,  the 
foundation  of  our  tax  system  is  the  general  property  tax.  It  is 
used  in  every  city,  county,  and  district.  There  are  only  a  few 
states  in  which  it  is  not  used  to  supply  revenue  for  the  state  or 
central  government.  It  is,  in  short,  as  one  writer  has  said,  "the 

structural  iron  which  holds  the  building  together the 

largest  single  source  of  revenue universally  regarded  as 

the  tax  for  all  purposes. "  l  In  the  State  of  Montana,  the  general 
property  tax  contributes  by  far  the  largest  part  of  all  taxes  col- 
lected for  all  purposes.  Now,  the  general  property  tax  is  based 
upon  the  theory  that  "every  man  should  pay  taxes  according  to 
his  ability  and  that  his  ability  is  approximately  measured  by  a 
valuation  of  all  property  owned  by  him  on  a  given  date,"  or  as 
another  writer  puts  it,  the  "popular  and  plausible"  assumption 
which  is  at  the  basis  of  our  state  and  local  taxation  is  that  as  all 
property  is  protected  by  the  state  and  as  all  persons  owe  alle- 
giance to  the  state,  all  persons  and  property  "must  contribute 
to  the  requirements  of  the  state  for  revenue  in  proportion  to  their 
ability. ' ' 2  The  idea  is  very  old  in  the  United  States.  Mr.  "Wells 
quotes  from  the  general  laws  of  Massachusetts'  of  1660  the  follow- 
ing lines :  '  *  The  court  considering  the  necessity  of  an  equal  con- 
tribution to  all  common  charges  in  town,  doth  order,  etc 

1  Carl  C.  Plehn,    Introduction  to  Public  Finance  (1916),  p.  248. 

2  D.  A.  Wells,    The  Theory  and  Practice  of  Taxation,  P-  394. 


DO  MINES  BEAR  ADDITIONAL  BURDEN  31 

And  every  such  inhabitant,  who  shall  not  contribute,  proportion- 
ally to  his  ability  to  all  common  charges,  etc. ' ' 1  The  Constitution 
of  Montana  lays  down  the  rule  of  uniformity  and  equality  which, 
in  accordance  with  the  spirit  of  all  American  state  constitutions, 
means  that  taxes  should  be  paid  in  proportion  to-  ability. 

This  disciission  of  the  theory  of  taxation  must  necessarily  be 
brief,  but  it  is  important  to  make  clear  that  Mr.  Kelly  and  his 
associates  cannot  claim  "finality"  for  their  views.  But  in  so  far 
as  the  general  argument  of  this  chapter  is  concerned,  it  makes 
little  difference  which  theory  of  taxation  one  holds.  Whether 
taxes  should  be  paid  according  to  benefits  derived  or  to  ability, 
the  supreme  question  is,  how  should  benefits  or  ability  be  meas- 
ured. This  is  a  very  complex  and  difficult  problem  which  cannot 
be  fully  discussed  here.  Besides,  the  question  before  us  is,  not 
what  is  the  true  theory  of  the  subject,  but  what  is;  the  actual 
practice ;  not  what  should  be,  but  what  really  is.  And  this  is  a 
question  which  can  be  more  readily  answered. 

Whatever  the  theory  of  taxation  implied  in  the  laws  of  Mon- 
tana, their  undoubted  intent  and  purpose  is  to  secure  uniformity 
and  equality.  Furthermore,  there  can  be  no  doubt  that  accord- 
ing to  the  laws  of  Montana,  the  means  of  securing  equality  is 
to  levy  taxes  in  proportion  to  the  value  of  property.  Whether 
the  framers  of  the  Constitution  and  the  law-makers  of  Montana 
believed  that  taxes  should  be  paid  in  proportion  to  benefit  or  in 
accordance  with  ability,  they  undoubtedly  felt  sure  that  a  per- 
son's ability  to  pay  or  the  benefits  derived  by  him  from  the  state 
are  measured  by  the  amount  and  value  of  property  owned  by 
him.  This  then  is  "the  rule  of  proportion"  which  is  clearly 
expressed  in  the  law.  Equality  of  taxation  is  attained  when 
each  class  or  kind  of  property  pays  taxes'  in  proportion  to  its 
value.  Individuals  or  corporations  can  claim  to  have  paid  a  pro- 
portionate share  of  taxes  only  when  they  have  paid  in  proportion 
to  the  value  of  their  property. 

The  law  of  Montana  requires  that  taxable  property  should  be 
assessed  at  its  full  cash  value  (section  2502  of  the  Revised  Codes') . 
Section  2501  of  the  Revised  Codes  specifies  that  the  terms  "val- 
ue" and  "full  cash  value"  mean  "the  amount  at  which  the 
property  would  be  taken  in  payment  of  a  just  debt  due  from  a 

1  Ibidem,  p.  244. 


32  MINE  TAXATION  IN  MONTANA 

solvent  debtor. ' '  In  other  words,  the  value  of  any  piece  or  form 
of  property  for  purpos'es  of  taxation  is  the  selling  or  market 
value.  This  is  clear  from  all  the  references  made  in  the  Code  to 
value  and  valuation.  The  only  problem  which  the  law-makers 
had  to  wrestle  with  was  how  and  by  what  methods  could  the 
value  of  various  forms  of  property  be  determined. 

The  answer  to  this  problem  is  embodied  in  those  articles  of 
the  Code  which  relate  to  the  assessment  of  property.  The  meth- 
ods of  assessment  laid  down  in  these  articles  are  as  different  as 
the  kinds  of  property  to  be  assessed.  Banking  corporations,  for 
instance,  are  assessed,  not  only  on  their  real  estate,  but  also  on 
the  capital  stock.  In  the  case  of  railroads,  the  assessment  covers 
not  only  the  roadbed,  rolling  stock,  rails,  roadway,  but  also  the 
right  of  way  and  the  franchises.  Private  bankers  are  assessed 
for  * '  the  amount  of  capital  invested  either  in  real  estate  or  cash, 
the  amount  of  surplus,  and  undivided  profits. ' '  Some  corpora- 
tions are  assessed  on  their  real  and  personal  property,  including 
capital  stock  and  franchises.  Land  is  assessed  on  the  basis  of 
its  use,  such  as  hay  lands,  irrigated  land,  grain  lands  of  first  and 
second  class,  and  so  on. 

It  cannot  be  claimed  that  the  methods'  of  assessment  laid  down 
in  the  Code  are  the  best  that  could  be  devised.  On  the  contrary, 
they  are  in  many  ways  antiquated.  They  have  not  been  changed 
in  a  generation  and  fall  far  below  the  new  methods  that  have 
been  developed  in  other  states.  But  that  is  another  question 
which  has  no  bearing  on  the  subject  considered  in  this  chapter. 
The  important  point  which  should  be  clear  from  tlje  above  ana- 
lysis of  the  Code  is  that  different  ways  of  assessing  property 
were  adopted  by  the  law-makers  of  the  state  because  they  knew 
that  the  true  value  of  different  classes  of  property  was  made  up 
of  different  elements.  What  they  strove  for  in  every  case  was 
"the  true  cash  value."  What  they  tried  to  do  was  to  devise  a 
special  method  of  assessment  which  would  get  at  "the  true  value" 
of  each  class  of  property. 

It  is  from  this  point  of  view  that  the  assessment  of  mines  must 
be  considered.  The  method  prescribed  by  the  Constitution  and 
the  statutes  consists  in  obtaining  the  value  of  a  mine  by  summing 
up  the  price  paid  the  United  States  for  the  surface,  the  value  of 
the  improvements,  and  the  net  proceeds  for  one  year.  This  may 


DO  MINES  BEAR  ADDITIONAL  BURDEN  33 

be  illustrated  by  the  assessment  of  the  mining  industry  in  Silver 
Bow  county  for  the  year  1917.  In  that  year,  the  total  assess- 
ment of  mining  claims  in  the  county  was  $149,850;  the  assess- 
ment of  improvements  was  $1,098,120 ;  mining  and  manufactur- 
ing machinery  amounted  to  $2,021,600;  while  the  net  proceeds 
in  the  county  were  $44,282,500;  that  is,  the  total  assessment  of 
mining  in  Silver  Bow  county  in  1917  was  $47,552,070.  If  the  net 
proceeds  had  been  deducted,  the  assessment  of  mining  property 
in  the  county  would  have  amounted  to  $3,269,570.  That  is,  the 
assessment  of  mining  claims,  lands,  improvements,  and  all  ma- 
chinery in  and  about  the  Silver  Bow  mines  in  1917,  was  a  little 
over  three  million  dollars. 

According  to  Mr.  Kelly's  statement  quoted  above,  when  the 
mines  have  been  assessed  for  their  surface  at  a  fixed  price  and 
for  their  improvements,  they  have  been  fully  assessed  as  com- 
pared with  all  other  forms  of  property.  In  other  words,  three 
million  dollars  in  his  opinion  was  the  real  value  of  the  great 
mining  industry  of  the  Butte  district  in  1917,  and  the  taxes  paid 
on  every  dollar  over  and  above  the  three  million  was1  an  extra 
burden  placed  on  the  mines  in  a  spirit  of  discrimination.  The 
statute  declares  that  the  true  value  of  property  means  the  amount 
at  which  the  property  would  be  taken  in  payment  of  a  just  debt 
due  to  a  solvent  debtor.  Do  Mr.  Kelly  and  his  associates  mean 
to  say  that  they  would  be  willing  to  dispose  of  all  the  mining 
property  in  Silver  Bow  for  three  million  dollars  ? 

It  is  evident  that  by  fixing  the  value  of  a  mining  claim  at  the 
price  " paid. the  United  States  therefor,"  the  Constitution  once 
for  all  stopped  that  economic  process  by  which  the  value  of  prop- 
erty is  determined.  When  a  homesteader  has  improved  his  land 
by  means  of  careful  tillage  and  scientific  farming  and  proper 
fertilization,  the  increased  income  producing  capacity  of  his  land 
is  reflected  in  the  value  placed  upon  it  by  the  market.  The 
homesteader  is  taxed  on  this  new  value  created  by  him.  He  is1 
not  taxed  on  the  price  "paid  the  United  States  therefor."  The 
new  value  of  his  land  is  in  the  surface,  the  possession  of  which 
makes  possible  the  utilization  of  all  the  potentialities  of  the  soil. 
The  same  is1  true  of  a  mine.  The  surface  of  a  mine  may  be  rough 
and  mountainous  and  unattractive  in  every  way,  but  the  posses- 
sion of  that  surface  is  essential  to  reach  the  wealth  stored  under- 


34  MINE  TAXATION  IN  MONTANA 

ground.  When  ore  is  discovered,  the  value  of  that  claim,  as  a 
claim,  rises  proportionately.  The  balance  sheet  of  any  mining 
company  clearly  shows  it.  But  the  Constitution  of  the  State  of 
Montana  forbids  the  assessor  from  incorporating  that  increased 
value  in  the  assessment  of  the  mine.  Regardless  of  the  immense 
treasures'  to  which  the  surface  of  a  claim  may  lead,  the  assessment 
must  remain  five  or  two  and  a  half  dollars  per  acre. 

This  is  a  fundamental  difference  between  the  assessment  of 
mines  and  other  property.  To  make  up  for  this,  the  Constitution 
and  the  laws  of  Montana  provide  for  the  assessment  of  net  pro- 
ceeds. The  tax  on  net  proceeds  is  not  in  addition  to  the  taxes 
on  surface  and  improvements'.  It  is  merely  a  device  for  ob- 
taining as  nearly  as  possible  the  true  value  of  a  mine.  The  law 
simply  implies  that  a  mine  is  a  form  of  property,  totally  dif- 
ferent from  other  kinds  of  property;  that  it  is  impossible  to 
assess  it  in  the  manner  in  which  land  or  banks'  or  gas  companies 
are  assessed ;  and  that  it  is  necessary,  therefore,  to  have  recourse 
to  a  different  device  which  should  be  as  well  adapted  to  this 
form  of  property  as  possible.  The  device  is  to  assume  that  the 
true  value  of  a  mine  equals  approximately  the  net  proceeds  of 
the  year  plus  the  nominal  price  paid  for  the  surface  and  the  value 
of  the  improvements. 

The  real  issue  between  those  who  defend  and  those  who  criti- 
cize the  system  of  mine  taxation  in  Montana  is  just  this :  is  the 
method  prescribed  by  the  Constitution  and  the  laws  the  best 
method  possible  for  obtaining  the  true  value  of  the  mines?  It 
cannot  be  too  emphatically  stated  that  no  other  issue  is  involved 
in  the  discussion  of  mine  taxation.  It  is  not  a  question  at  all 
whether  the  mines  are  exempt  from  taxation.  They  are  not, 
and  there  is  no  reason  why  they  should  be.  But  is1  the  assess- 
ment of  the  mines  based  on  sound  principles,  and  does  it  achieve 
its  purpose?  This  is  the  question  which  demands  an  answer 
and  which  will  be  discussed  in  a  subsequent  chapter. 

"Whatever  answer  may  be  given  to  this  question,  it  is  necessary 
to  dispel  the  impression,  if  such  exists  anywhere,  that  the  mining 
interests  have  at  any  time  been  subject  to  unfavorable  dis'crim- 
ination  in  the  State  of  Montana.  That  statements  to  that  effect, 
such  as  were  quoted  above,  should  be  made  by  responsible  and 
intelligent  persons  is  an  illustration  of  the  manner  in  which  the 


DO  MINES  BEAR  ADDITIONAL  BURDEN          35 

question  has  been  discussed  in  the  state.  An  impartial  con- 
sideration of  the  evidence  leads  to  quite  the  opposite  conclusion. 
In  territorial  days,  with  the  exception  of  the  period  from  1872 
to  1879,  mines  and  mining  claims  were  entirely  exempt  from 
taxation.  The  territorial  legislatures  showed  their  solicitude  for 
the  mining  industry,  not  only  by  exempting  it  from  taxation, 
but  by  repeated  memorials  to  Congress*  for  legislation  which 
would  favor  its  development.  Even  the  last  territorial  legisla- 
ture in  1889  sent  a-  memorial  to  Congress  which  is  worth  quoting, 
because  it  illustrates  so  well  the  spirit  of  solicitude  referred  to 
above.  The  memorial  reads  as  follows : 

"That  the  mining  of  minerals  being  the  chief 
industry  of  our  territory,  and  notwithstanding  the 
fact  that  last  year  our  mineral  product  approximated 
forty  millions  of  dollars,  we  consider  the  industry  prac- 
tically in  its  infancy,  and  such  being  the  facts  it  will  be 
readily  seen  that  we  offer  an  almost  unlimited  field  for  the 
profitable  investment  of  capital,  and  to  that  end  we  most 
respectfully  urge  favorable  action  by  your  honorable  body 
upon  Senate  Bill  1176,  and  thus  open  the  field  to  the  free 
and  untrammeled  introduction  of  foreign  capital  for  the 
purpose  of  further  developing  our  mining  industry." 

The  above  memorial  was  sent  to  Congress  in  1889.  The  Con- 
stitutional Convention  was  held  a  few  months  later.  A  few  of 
the  men  who  sat  in  the  last  territorial  legislature  were  delegates 
to  the  Constitutional  Convention.  The  Committee  on  Taxation 
had  among  its  members  men  whose  loyalty  to  the  mining  interests 
cannot  be  questioned.  It  is  inconceivable  that  such  a  Constitu- 
tional Convention  should  have  been  inspired  by  a  desire  to  ' '  pen- 
alize ' '  the  mining  industry  and  to  impose  on  it  the  whole  burden 
of  taxation.  No  evidence  can  be  adduced  to  support  such  an  in- 
terpretation. On  the  contrary,  even  the  decision  of  the  Supreme 
Court,  quoted  by  Mr.  Kelly  in  support  of  his  contention,  proves 
just  the  opposite.  The  Supreme  Court  specifically  says  that  the 
problem  before  the  Constitutional  Convention  was  how  to  compel 
the  mining  industry  to  respond  to  the  reasonable  demands  of  the 
state  for  revenue,  "and  at  the  same  time  protect  it  against  such 
exactions  as  would  or  might  discourage  prospecting  or  develop- 
ment." The  Court  further  says  that  the  framers  of  the  Con- 
stitution acted  deliberately  with  the  purpose  of  subjecting  mines 


36  MINE  TAXATION  IN  MONTANA 

and  mining  claims  to  what  in  their  judgment  was  the  "equitable 
proportion  of  the  burden  of  governmental  expense." 

There  is  not  the  slightest  reference  in  this  decision  to  any 
desire  to  "penalize"  the  mining  industry.  The  words  of  this 
decision  are  as  clear  as  they  can  be.  But  there  is  on  record 
another  decision  of  the  Supreme  Court  which  throws  additional 
light  on  the  subject.  In  the  case  of  the  State  versus  Sing,  18 
Montana,  page  139,  Justice  De  Witt  of  the  Supreme  Court  of 
Montana  s'aid:  "Mines  and  mining  claims  in  the  state  are  lib- 
erally protected  from  what  might  be  deemed  excessive  taxation." 

The  opinions  of  the  Supreme  Court  are  sufficient  proof  of  the 
real  meaning  and  intent  of  the  law  on  mine  taxation.  But  it  may 
not  be  amiss  to  quote  the  opinions1  of  two  citizens,  of  whom 
Montana  is  justly  proud,  and  who  on  account  of  their  intimate 
connection  with  all  phases  of  Montana  political  life  were  in  a 
peculiarly  favorable  position  to  know.  The  first  quotation  is 
from  the  message  to  the  legislature  delivered  on  January  7, 
1901,  by  Governor  J.  K.  Toole,  and  is  as  follows : 

"It  was  the  purpose  of  the  framers  of  the  State  Con- 
stitution to  stimulate  the  explorations  and  developments  of 
our  mineral  resources,  and  to  that  end  they  exempted  min- 
ing claims  from  taxation  beyond  the  price  paid  to  the 
United  States  for  the  same,  and  in  lieu  thereof  subjected 
their  net  proceeds  to  taxation" 1 

Governor  Toole  thought  that  the  provision  was  "wise  and 
salutary"  contributing  largely  to  the  creation  of  great  prop- 
erties within  the  state.  But  another  citizen  of  the  state,  one 
who  is  justly  regarded  among  its  founders  and  whose  name  and 
memory  are  cherished,  took  a  different  view  on  the  subject.  In 
his  dedication  speech  on  the  completion  of  the  new  State  Capitol, 
Colonel  W.  F.  Sanders  took  occasion  to  make  the  following 
statement : 

"Claiming  for  these  founders  of  our  Commonwealth  all 
that  is  their  due,  it  were  too  much  to  affirm  that  they  were 
not  subject  to  the  infirmities  of  human  nature  and  made 
no  mistakes.  To  the  end  that  they  might  be  corrected,  they 
would  choose  that  the  more  important  of  them  be  mentioned 
even  on  a  congratulatory  occasion  like  this.  With  the  cour- 

1  Italics  mine. 


DO  MINES  BEAR  ADDITIONAL  BURDEN          37 

age  which  was  a  conspicuous  trait  in  their  character  to 
assist  a  hazardous,  hopeful  infant  industry,  they  took  upon 
themselves  a  portion  of  its  burdens  by  absolving  it  from  its 
share  of  taxation.  x  When  thus  delivered  the  interest  and 
amount  was  small,  but  it  has  now  grown  to  colossal  propor- 
tions and  is  one  of  our  chiefest  and  most  remunerative  re- 
sources. But  the  advantage  thus  given  has  not  been  relin- 
quished, and  what  in  its  nature  and  purpose  was  designed 
to  be  temporary,  by  the  forethought  and  adroitness  of  greed, 
has  been  taken  from  the  domain  of  legislation  and  become 
inwoven  in  constitutional  enactment  as  a  permanent  policy 
of  the  state. *  It  does  not  require  a  wide  knowledge  of 
human  nature  to  discern  that  when  the  ownership  of  private 
property  does  not  carry  with  it  the  equal  burden  which  that 
ownership  implies,  a  disregard  of  the  sanctities  of  title  is 
begotten,  which  may  wreak  abounding  mischief.  Absolute 
equality  of  taxation  of  property  is  the  primal  essential 
of  justice  unless  it  is  desired  to  cultivate  a  superior  class 
to  own  the  property  and  a  proletariat  or  peasantry  to  be- 
come their  serfs.  The  irony  of  the  situation  is  not  belittled 
by  the  fact  that  the  property  so  absolved  from  taxation  in 
the  nature  of  things  makes  disproportionate  and  increas- 
ing demands  on  the  money  and  solicitude  of  the  Common- 
wealth. Matters  will  not  assume  a  normal  condition  until 
a  Constitutional  provision  ordains  that  every  piece  of  prop- 
erty not  of  Public  Ownership  shall  according  to  its  value 
bear  its  equal  burden  of  taxation.  This  seems  too  plain 
to  admit  of  discussion."  2 

Governor  Toole  and  Colonel  Sanders  are  not  to  be  classed 
among  "the  agitators."  Their  opinion  corroborates1  the  inter- 
pretation placed  upon  the  law  by  the  courts.  Their  statements 
are  additional  evidence  that  the  intent  of  the  Constitution  was 
not  to  ' '  penalize ' '  the  mining  industry  but  to  encourage  it. 

1  Italics  mine. 
2  Historical  Society  of  Montana,  Vol.  IV,  pp.  141-2. 


CHAPTER  IV. 

TAXES  PAID  BY  MONTANA  MINES. 

The  representatives  of  the  mining  interests  maintain  that  '  *  the 
mining  industry  in  this  state  has  heretofore  borne  its  proportion- 
ate share  of  the  taxes1  of  the  state."1  Others  deny  it.  The 
question  cannot  be  answered  by  mere  quotations  of  opinion  on 
either  side.  To  reach  a  definite  conclusion,  the  known  facts  in 
the  case  must  be  summoned  to  furnish  the  evidence. 

The  basis  of  taxation  is  the  assessment  of  property.  Under 
the  general  property  tax  all  property,  real  and  personal,  pays 
a  uniform  rate  on  its  assessment.  Under  the  laws  of  Montana, 
the  net  proceeds  of  mines  are  personal  property  and  are  taxed 
at  the  s'ame  rate  as  other  personal  property  in  the  state.  A 
comparison  of  the  assessment  of  different  classes  of  property  may 
serve  as  an  indication  of  the  burden  of  taxation  borne  by  the 
respective  kinds  of  property. 

The  abstracts  published  by  the  State  Board  of  Equalization 
on  the  basis  of  the  reports  sent  in  by  the  county  assessors  do  not 
classify  the  data  in  sufficient  detail.  In  many  counties  all  or  a 
large  part  of  the  land  is  unclassified,  and  improvements  are 
lumped  under  one  heading.  To  obtain  an  exact  classification  of 
the  total  assessment  of  the  state  by  kinds'  of  property  or  in- 
dustries is  therefore  impossible.  But  the  official  figures 
which  are  at  present  available  and  the  statistics  collected 
by  the  present  Temporary  Tax  and  License  Commission 
enable  one  to  calculate  the  assessment  of  certain  in- 
dustries closely  enough  to  make  some  valid  comparisons. 
The  following  tables  are  based  on  such  figures  obtained  from  the 
State  Board  of  Equalization,  from  reports  of  assessors,  and  from 
the  data  collected  by  the  Temporary  Tax  Commission.  In  these 
tables,  the  assessment  of  mining  includes  the  assessment  of  min- 
ing claims  and  improvements  thereon,  coal  lands  and  improve- 
ments thereon  wherever  separately  stated,  mining  ditches,  smelt- 
ers and  smelter  lands,  stored  ore  and  bullion,  all  mining  and 

1  C.  F.  Kelly,  Mining  Taxation  in  Montana,  P.  4. 
38 


TAXES  PAID  BY  MONTANA  MINES 


39 


manufacturing  machinery,  and  net  proceeds.  It  is*  true  that 
here  and  there  a  county  assessor  may  not  report  separately  the 
improvements  on  mining  claims.  But  this  is*  offset  by  the  items 
included  in  the  above  classification  which  credits  mining  with 
all  the  assessed  manufacturing  machinery  in  the  state  and  with 
a  part  of  the  farming  machinery  which  some  assessors  neglect 
to  enter  separately.  On  the  basis  of  these  data  it  is  possible  to 
compare  the  assessment  of  the  chief  classes  of  property  in  Mon- 
tana for  various  years.  Table  I  presents  the  assessment  of 
farming  and  grazing  lands  and  of  mining  in  relation  to  the  total 
valuation  of  the  state  for  the  years  1917-1918. 


TABLE  I 


1918 

1917 

Kind  of  property 

Total 
assessment 

Per 
cent  of 
total 

Total 
assessment 

Per 

cent  of 
total 

All  property  in  state  

$589,304,187 

100. 

$582,286,529 

100. 

Farm  and  grazing  lands  and 
improvements       

191,792,730* 

32.5 

178,033,237* 

30.6 

Mining  inclusive  of  net  proceeds 

36,162,436f 

6.2 

62,012,058f 

10.6 

*  These  figures  were  obtained  by  adding  the  following  items:  (a)  the  as- 
sessment of  farm  and  grazing  lands  as  reported  by  the  State  Tax  Commission; 
(b)  50  per  cent  of  the  assessed  improvements  on  all  such  lands;  this  is  a 
very  conservative  estimate  of  the  assessed  value  of  improvements  which  may 
unqualifiedly  be  credited  to  farming  and  grazing  lands,  and  (c)  the  assessed 
value  of  improvements  on  lands  title  to  which  is  vested  in  another  than 
person  so  listing  it. 

t  The  totals  for  mining  include  the  assessed  valuation  of  the  smelters  at 
Anaconda  and  Great  Falls  which  were  reported  to  the  State  Tax  Commission 
as  equal  to  $6,680,000  and  to  $8,795,000  in  1917  and  1918  respectively.  These 
figures  probably  include  other  improvements  owned  by  tne  mining  companies 
and  therefore  offset  omissions  of  some  mining  properties  not  properly  listed 
by  the  assessors.  Though  the  figures  in  Table  I  contain  such  estimates,  they 
have  a  comparative  value. 

It  is  difficult  to  separate  farm  and  grazing  lands  from  all 
other  real  estate  for  the  years  preceding  1917.  But  the  assess- 
ment of  several  other  classes  of  property  is  ascertainable  and  is 
presented  in  Table  II. 


40 


MINE  TAXATION  IN  MONTANA 

TABLE  II 


Tear 

Total  valua- 
tion of  state 

City  and 
town  lots 
and   im- 
provements 

Railroads 

Livestock 

Mining  in- 
clusive of 
net 
proceeds! 

1917 

$582,286,529 

$89,586,247 

$87,651,336 

$65,685,652 

$62,012,058 

1916 

487,898,353 

81,297,786 

85,816,429 

52,384,484 

43,710,854 

1915 

439,785,918 

79.237,366 

84,740,925 

46,236,493 

24,759,863 

1914 

412,361,919 

76.201,650 

80,386,550 

40,009,275 

26.178,435 

1913 

382,807.277  I    72.314.101 

77,965,590 

38,377.221 

27,759,234 

1912 

346,550,5851    68,632,991 

68,481,299 

33,900,269 

26,405,702 

1911 

331,670,418  I    66,957,014 

66,975,126 

35,139,271 

20,341,953 

1910 

309,673,699 

62,250,560 

65,696,246 

37,123,378 

21,147,666 

1909 

280,401,064 

58,537,087 

58,422,849 

36.864,680 

19,663,386 

1908 

248,774,792 

53,899,318 

45,942,989 

33,013,809 

16,802,228 

1907 

251,882,437 

52,228,494 

43,816,035  * 

32,531,152 

30,644,620 

1906 

233,953,571 

48,043,382 

41,914,936  * 

32,137,547 

29,903,724 

1905 

209,912,340 

46,161,301 

37,826,193  * 

31,333,144 

20,776,069 

1904 

201,748,063 

45,940,426 

37,714.176  * 

28.892.629 

18,567,813 

1903 

201,333.315 

45,213,051 

36,327,585  * 

35,812,871 

17,909,233 

1902 

185,725,657 

44,290.131 

32,772.594  * 

32,561,515 

15,775,938 

1901 

166,787,593 

42,138,515 

16,259,424  * 

28,264,217 

24,381,382 

1900 

153,401,594 

39,895,823 

15,612,936  * 

26,281,473 

22,002,224 

1899 

142,117,655 

38,700,114 

15,584,453  * 

23,705,794 

16,255,197 

1898 

133,969,519 

36,947,697 

14,398,881  * 

22,229.761 

14.987,525 

t  It  was  possible  to  obtain  the  assessed  value  of  the  smelters  at  Anaconda 
and  Great  Falls  for  1913  and  1914,  which  was  $5,379,000  and  $5,483,000  re- 
spectively and  for  1917-1918  as  indicated  in  Table  I.  For  the  years  1898- 
1906,  the  value  of  the  smelters  in  this  table  was  taken  as  equal  to  the  report- 
ed value  of  improvements  on  real  estate  (other  than  city  and  town  lots)  in 
Cascade  and  Deer  Lodge  counties  which  rose  from  $2,717,000  in  1898  to 
$4,429,000  in  1906.  For  the  years  1907-1912  for  which  such  figures  are  not 
available  the  assessed  value  of  the  smelters  was  taken  as  equal  to  $5,000,000, 
and  for  the  years  1915-1916  as  equal  to  $6,000,000  and  $6,500,000  respectively. 
In  all  these  estimates  the  mining  industry  is  given  the  benefit  of  the  doubt 
in  order  to  offset  any  underestimation  which  may  have  resulted  from  in- 
adequate classification  by  assessors.  On  the  whole  the  figures  are  believed 
to  give  a  comparative  view  of  the  situation. 

*  Includes  depots,  but  does  not  include  railroad  lands  or  other  railroad 
property. 

These  figures  may  be  more  easily  grasped  when  reduced  to 
five  year  averages  which  are  given  in  Table  III. 


TABLE  III. 


Average 

Average 

annual  as- 

Average 

Average 

annual  as- 

Average an- 

sessment of 

annual  as- 

annual as- 

sessment 

Period 

nual  assess- 

city and 

sessment 

sessment 

of  mining 

ment  of  state 

town  lots 

of  rail- 

of live- 

inclusive 

and  im- 

roads 

stock 

of  net 

provements 

proceeds 

1913-1917 

$461,027.999 

$79,727.430 

$83,312,166 

$48.538,625 

$36,884,089 

1908-1912 

303,414,111 

62,055,394 

61.103.722 

35,208,281 

20,872.187 

1903-1907 

210,765.944 

47,517,331 

39,539,785 

32,141,468 

23.560,292 

1898-1902 

156.400.402 

40.394,456 

18,925,657 

26,608,552 

18,680.453 

TAXES  PAID  BY  MONTANA  MINES  41 

The  above  table  shows  that  during  the  twenty  years  under  con- 
sideration the  average  valuation  of  the  state  increased  about 
three  times ;  that  the  assessment  of  railroads  was1  over  four  times 
larger  during  1913-1917  than-  during  1898-1902,  but  that  the 
greatest  increase  in  the  assessment  of  railroads  occurred  between 
1901  and  1903 ;  and  that  city  realty,  livestock  and  mining  were 
assess'ed  about  twice  as  high  during  1913-1917  as  during  1898- 
1902.  Confining  the  comparison  to  the  fifteen  years  1903-1917, 
one  finds  that  while  the  assessment  of  railroads  increased  as 
rapidly  as  the  total  valuation  of  the  state,  such  classes  of  prop- 
erty as  livestock,  mining,  and  city  realty  did  not  quite  keep  pace 
with  the  general  movement.  As  the  one  other  large  class  of 
property  in  the  state  is  farming  and  grazing  lands  and  improve- 
ments thereon,  it  would  seem  that  the  increase  in  the  assessment 
of  such  lands  must  have  been  more  rapid  than  the  average  in- 
crease in  the  total  assessment  of  the  state.  This  can  be  explained 
in  considerable  measure  by  the  steady  growth  of  agriculture  in 
the  state  since  1900.  But  there  can  be  little  doubt  that  this 
disproportionate  increase  is  to  some  extent  the  result  of  in- 
adequate tax  administration.  For  instance,  in  the  case  of  live- 
stock, a  comparison  of  the  assessments  in  Montana  with  the  true 
valuations  calculated  by  the  U.  S.  Department  of  Agriculture 
shows  that  in  1906  the  assessment  of  livestock  was  over  60  per 
cent  of  reported  true  value,  and  that  from  1910  to  1915  the  assess- 
ment decreased  from  49  to  44  per  cent  of  reported  true  value. 
There  was  some  increase  in  1916  and  1917,  but  the  trend  for 
the  fifteen  years,  1903-1917,  was  in  the  direction  of  relatively 
smaller  assessments  of  livestock  which  were  not  warranted  by  any 
corresponding  decrease  in  the  true  value  of  livestock  reported 
by  the  Department  of  Agriculture.  It  is  probable  that  if  figures 
were  available  for  other  classes  of  property,  a  similar  condition 
would  be  revealed. 

The  facts  shown  in  Table  III  may  be  made  clearer  by  reducing 
the  figures  to  a  percentage  basis  as  is  shown  in  Table  IV  on  the 
following  page. 


42 


MINE  TAXATION  IN  MONTANA 

TABLE  IV. 


Percenta 

ge  of  total 

assessmenl 

.  of  state 

Class   of  property 

1913-1917 

1908-1912 

1903-1907 

1898-1902 

Total  assessment  of  state  

100. 

100. 

100 

100 

City  and  town  lots  and  improve- 
ments                   ... 

17.3 

205 

216 

258 

Railroads   

18.7 

20.1 

17.9 

121 

Livestock 

105 

116 

146 

170 

Mining  inclusive  of  net  proceeds 

8.0 

6.9 

10.7 

11.9 

Table  IV  shows  that  the  assessment  of  railroads  formed  an 
ever  larger  percentage  of  the  total  assessment  of  the  state  from 
1898  to  1912;  but  that  during  1913-1917  the  proportion  de- 
creased. On  the  other  hand,  the  assessment  of  city  real  estate 
and  livestock  formed  a  constantly  decreasing  proportion  of  the 
total  assessment  of  the  state.  This  is'  in  accord  with  the  conclu- 
sions reached  above. 

The  figures  presented  above  show  that  no  definite  tendency 
can  be  discerned  in  the  assessment  of  the  mining  industry.  It 
varies  from  year  to  year  and  from  period  to  period.  This  is'  the 
result  of  the  method  of  assessing  mines  which  makes  the  net 
proceeds  the  most  important  item  in  the  valuation  of  a  mine. 
The  wide  range  of  the  fluctuations  to  which  the  assessment  of 
the  net  proceeds'  of  mining  is  subject  may  be  seen  from  the  fact 
that  in  1918  the  total  net  proceeds  of  the  state  were  equal  to 
$17,355,196  as  against  $45,519,461  in  1917.  The  decrease  thus 
amounted  to  $28,164,265  or  about  62  per  cent.  A  more  detailed 
statement  of  the  fluctuations  in  the  assessment  of  net  proceeds 
is  presented  in  Table  V  which  follows. 


TAXES  PAID  BY  MONTANA  MINES 


43 


TABLE  V. 


Tear 

Total  assess- 
ment of 
state 

Mining 
claims  filed 
or  patented 

Improve- 
ments on 
same 

Net 
proceeds 

Per  cent  of  net 
proceeds  of  to- 
tal assessment 
of  state 

1017 

$582,286,529 

$720,998 

$1,709,134 

$45,519,461 

7.8 

1916 

487,898,353 

725,778 

1.462,475 

28,605,355 

5.9 

1915 

439,785,918 

669,843 

1,478,295 

10,855,342 

2.5 

1914 

412,361,919 

655,625 

1,409,546 

11,517,166 

2.8 

1913 

382,807,277 

634,072 

1,287,905 

14,509,695 

3.8 

1912 

346,550,585 

590,634 

1,285,423 

12.116.283 

3.5 

1911 

331,670,418 

650,807 

1,354.320 

6,203,590 

1.9 

1910 

309,673,699 

641,682 

1,389,990 

8,117,602 

2.6 

1909 

280,401,064 

594,329 

1,323,805 

6,983,713 

2.5 

1908 

248,774.792 

515,801 

1,216,717 

4,731,884 

1.9 

1907 

251,882,437 

632,496 

1,139,977 

20,358,119 

8.1 

1906 

233,953,571 

600,432 

1,315,360 

19,264,423 

8.2 

1905 

209,912,340 

528,679 

1,231,377 

10,532,425 

5.1 

1904 

201,748,063 

444,863 

1,411,327 

7,861,624 

3.9 

1903 

201,333,310 

402,137 

1,381,927 

8,056,355 

4.0 

1902 

185,725.657 

407,440 

1,908,928 

5.948,558 

3.2 

1901 

166,787,588 

407,325 

1,918,014 

16.281,271 

9.8 

1900 

153,401,594 

411,690 

2,140,466 

14,168,708 

9.2 

The  fluctuations  in  net  proceeds  are  chiefly  the  result  of  gen- 
eral market  conditions,  prices,  cost  of  production,  labor  trou- 
bles, etc.  But  the  total  amount  of  net  proceeds  in  any  one  year 
may  also  be  affected  by  the  amount  of  development  work  and 
improvements  carried  out  by  the  mining  companies.  As  the 
law  allows  the  deduction  of  all  sums  spent  in  this1  way  from 
gross  proceeds,  it  may  happen  that  even  during  a  prosperous 
year  the  amount  of  net  proceeds  should  be  considerably  re- 
duced by  such  work  of  development  and  expansion.  This  is 
clear  from  Table  VI  which  shows1  the  manner  in  which  the  pro- 
portion of  net  to  gross  proceeds  fluctuates. 

TABLE  VI. 


1916 

1915 

1914 

1913 

1912 

Gross  proceeds 
of  mines  in 
Montana*.— 
Net   proceeds 
assessed  
Per   cent 

$145,325,000 

28,605,355 
19.6 

$87,000,000 

10,855,342 
12.4 

$47,849,747 

11,517,166 
24.07 

$61,900,546 

14,509,695 
23.4 

$64,754,613 

12,116,283 

18.7 

*  Includes  gold,  silver,  copper,  lead  and  zinc  mines. 

44  MINE  TAXATION  IN  MONTANA 

It  is  also  clear  from  the  above  tables  that  the  assessment  of 
the  surface  and  improvements  of  mines  is1  largely  nominal.  It 
amounted  to  $2,552,156  in  1900  and  to  $2,188,253  in  1916. 
Even  the  assessment  of  the  surface,  improvements,  smelters,  min- 
ing ditches,  and  all  machinery  (including  that  in  manufacturing 
establishments)  yields1  a  small  total  indeed:  $13,249,539  for 
1913;  $14,661,269  for  1914;  $13,904,521  for  1915;  $15,105,499 
for  1916;  and  $16,492,597  for  1917.  These  figures  refute 
the  claim  that  the  mining,  industry  would  be  adequately  taxed  if 
only  the  surface  and  the  improvements  were  assessed.  On  the 
contrary,  these  figures'  show  that  the  assessment  of  the  mines, 
exclusive  of  net  proceeds,  is  not  comprehensive  and  does  not 
represent  the  real  value  of  the  mining  industry.  This 
becomes  clearer  when  it  is  remembered  that  the  surface  and 
improvements,  including  machinery,  of  all  mines  in  Silver  Bow 
County,  which  produces  all  but  a  small  part  of  the  mineral 
output  of  the  state,  were  assessed  at' $2,512,390  in  1913;  $2,546,- 
905  in  1914;  $2,670,765  in  1915;  $2,701,990  in  1916;  and  at 
$3,269,570  in  1917. 

The  figures  for  1918  confirm  the  statements  made  above.  The 
assessment  of  the  mining  industry  is  again  below  that  of  the 
preceding  two  years,  1917  and  1916.  The  decrease  is1  the  result 
of  a  sharp  decline  in  the  net  proceeds  which  in  1918  amount  to 
$17,355,196  as  against  $45,519,461  in  1917  and  $28,605,355  in 
1916.  As  a  result,  the  proportion  of  mining  assessment  to  the 
total  assessment  of  the  state  is1  much  lower  than  in  1917  and 
1916,  and  the  percentage  of  the  total  assessment  borne  by  other 
classes  of  property  is  increased  proportionately. 

The  assessment  of  different  classes  of  property  is  the  only 
available  index  of  the  comparative  burden  of  taxation  borne  by 
such  property.  No  data  arc  accessible  which  would  show  either 
the  amount  of  taxes  paid  by  different  classes  of  property  or 
their  respective  earnings.  The  Tax  Investigation  Committee 
appointed  by  the  legislature  in  1917  attempted  such  a  compari- 
son for  the  year  1916  and  prepared  a  table  for  that  purpose, 
which  appears  on  the  following  page. 


TAXES  PAID  BY  MONTANA  MINES 


45 


TABLE  VII. 


Property  or 
Industry 

Assessed 
valuation 

Per 

cent 
of 
total 
assess- 
ment 
of 
state 

Gross 
proceeds 

Net 
proceeds 

Total 
taxes 
paid  for 
all 
purposes 

Railway  industry 
(2  counties  miss- 
ing)     

$  83,939,723 

15.29 

$  60,199.998 

$28,270,875 

$2,335,047 

Other  railroad 
property  

13,229,672 

2.71 

none 

none 

288,019 

Mining   industry 
(  including    net 
proceeds)   
All  mining  prop- 
erty 

41,856,095 
42,918,260 

8.57 
8.79 

146,500,000 

28,605,355 

1,292,296 
1,325,792 

Livestock  and  wool 

52  384  484 

1073 

54  187  960 

Farm  lands  and 
improvements  

156,818.411 

32.14 

81,154,190 

Banks   

11,412,391 

2.33 

Telephone   Co.'s.... 

1,364,319 

0.279 

50,471 

Telegraph    Co.'s 

570,113 

0.117 

14,722 

Express    Co.'s  

157,784 

0.032 

174,853 

5,446 

Power  Co.'s 

10,140,412 

2.078 

287,523 

On  the  basis  of  these  figures  obtained  by  the  Tax  Investigation 
Committee  it  is  possible  to  make  a  few  comparisons  as  is  shown 
in  Table  VIII. 

TABLE  VIII. 


Property  or  industry 

$100  of  as- 
sessed valu- 
ation 

$100  of 
gross 
proceeds 

$100  of 
net 
proceeds 

Railway  industry  (2  counties  missing) 
Telephone  companies  

$2.70 
3.69 

$3.88 

$8.25 

Express  companies 

3.45 

311 

Power  companies  

2.83 

Mining  industry  (inclusive  of  net 
proceeds  ) 

308 

882 

451 

Amount  of  taxes  paid  on 


The  only  valid  comparison  which  may  be  made  on  the  basis 
of  the  above  table  is  that  of  the  amount  of  taxes  paid  on  every 
hundred  dollars  of  net  proceeds.  Table  VIII  shows  that  the 
mining  industry  compares  well  in  this  respect  with  the  express 
companies,  but  that  it  lags  behind  the  railroads.  This  table 


46 


MINE  TAXATION  IN  MONTANA 


confirms  in  another  way  the  conclusions'  reached  above  by  com- 
paring the  assessments  of  these  industries.  The  data  at  hand 
do  not  permit  comparisons  with  other  classes  of  property  within 
the  state. 

The  relative  tax  burden  borne  by  the  mining  industry  in 
Montana  may  also  be  gauged  by  comparing  conditions  in  the 
principal  mining  states  of  the  country.  As  all  mines  must 
compete  in  the  same  market,  the  comparison  is  entirely  justified. 
The  figures  presented  in  the  following  tables  are  taken  from 
L.  E.  Young's  Mine  Taxation  in  the  United  States  and  are  for 
the  year  1909.  In  view  of  the  predominance  of  one  or  the  other 
mineral  in  various  states,  the  figures  are  compared  for  different 
classes  of  mines  separately  as  follows : 

TABLE  IX.     COPPER  MINES. 


State 

Value  of 
product 

Expenses 
not  includ- 
ing- taxes 

Surplus 
before 
taxes  are 
paid 

Taxes 
paid 

Per  cent 
)f  surplus 
paid  in 
taxes 

Michigan  

$30.165,443 

$23,508,650 

$6.656,793 

$950,821 

14.28 

Idaho 

416,086 

300,866 

115,220 

9,674 

8.42 

Arizona 

31  614,116 

24,979,482 

6,634,634 

404,046 

6.09 

Montana    

45,960,517 

37,678,032 

8,282,485 

395,577 

4.78 

Utah            

8.843,099 

2,082,984 

66,190 

3.18 

TABLE  X.     GOLD  AND  SILVER  MINES. 


State  and  class  of 
mines 

Value  of 
product 

Expenses 
not  includ- 
ing taxes 

Surplus 
before 
taxes  are 
paid 

Taxes 
paid 

Per  cent 
)f  surplus 
paid  in 

taxes 

DEEP  MINES  — 
Montana    

$  3,002,328 

$  2,978,814 

$      23,514 

$  17,309 

73.63 

California 

9  690,956 

9  344  688 

346  268 

122  656 

35.43 

Idaho 

7  926  602 

6  439  546 

1  487  058 

143  237 

963 

Nevada    

17.807,945 

11,391,815 

6,416,130 

212,663 

3.32 

Utah  

8.541,522 

5,980,378 

2,661,144 

84,125 

3.16 

GOLD  PLACERS  — 
Oregon 

159.002 

117,559 

41,443 

3,238 

7.81 

Colorado 

448,586 

248,521 

200,065 

13,111 

6.56 

Montana    

502,653 

398,296 

104,357 

4,988 

4.78 

California   

8,751,032 

5,517,855 

3,233,177 

91,000 

2.82 

TAXES  PAID  BY  MONTANA  MINES 


47 


The  above  tables  show  that  at  least  in  the  year  1909  the  tax 
burden  borne  by  the  mining  industry  as  a  whole  was1  lighter  in 
Montana  that  in  Michigan,  Arizona,  Colorado,  and  in  a  number 
of  other  states  which  are  inferior  to  Montana  in  the  amount  of 
either  gross  or  net  earnings  from  mines.  The  statistics  also 
reveal  the  fact  that  the  tax  burden  in  1909  fell  most  heavily  on 
gold  and  silver  deep  mines,  while  it  was  much  lower  for  copper 
mines  than  for  the  mineral  industry  of  the  state  as  a  whole. 

Several  of  the  states  which  show  a  relatively  low  percentage  of 
taxes  paid  to  surplus  in  the  above  tables  have  since  recognized 
that  their  mines  were  not  bearing  their  share  of  the  tax  burden. 
The  Utah  Board  of  Equalization  in  its  biennial  report  for  1915-16 
wrote  that  the  producing  mines  in  the  state  were  "paying  less 
taxes,  according  to  their  values',  than  are  the  mines  of  any  other 
state  in  the  Union,  far  less  than  their  fair  share  of  the  public 
burden."1  The  Colorado  State  Tax  Commission  in  its  report 
for  1916  demanded  that  mines  be  assessed  as  all  other  property 
at  their  "true  cost  value."  The  greatest  step  forward,  however, 
has  been  made  in  Arizona  where  the  State  Tax  Commission  has 
for  the  past  five  or  six  years  applied  its  greatest  efforts  to  the 
problem  of  mine  taxation.  The  assessment  of  mines'  in  Arizona 
increased  from  $45,145,084  in  1912  to  $216,879,796  in  1916 ;  it 
formed  31.7  per  cent  of  the  total  valuation  of  the  state  in  1912, 
and  44.2  per  cent  in  1916.  The  relative  assessment  of  the  in- 
dustry in  the  two  states  in  1916  may  be  presented  in  the  follow- 
ing table. 


TABLE  XI. 


Montana 

Arizona 

Gross  proceeds  from   mines 

$146  500  000 

$  82036342 

Net  proceeds  reported  

28,605,355 

41,845  604 

Assessed  valuation  of  mining 

43  710  854 

171  888  616* 

Assessment  per  $100  of  gross  proceeds  
Assessment  per  $100  of  net  proceeds 

29.8 
1528 

209.5 
4108 

*  Producing  mines  only. 

1  Boards  of  Equalization  of  Utah,  Report  for  1915-16,  P.  73. 

2  State  Tax   Commission  of  Colorado,  Reports  for  1916,  P-  13. 


48  MINE  TAXATION  IN  MONTANA 

Comparing  the  proportion  of  the  assessed  valuation  to  net 
proceeds  only,  one  finds  that  in  1916  the  mines  of  Arizona  were 
assessed  about  -three  times  as  heavily  as  the  mines  of  Montana. 
The  significance  of  this  comparison  is1  enhanced  by  the  fact  that 
some  of  the  mines  in  Arizona  and  Montana  are  under  the  same 
ownership  and  control. 


CHAPTER  V. 
WHAT  Is  ' '  NET  PROCEEDS  ' '  ? 

Net  proceeds  form  the  most  important  single  item  in  the  total 
assessment  of  the  mining  industry  in  Montana.  This  condition 
makes  it  imperative  to  form  a  clear  idea  as1  to  the  meaning  and 
nature  of  ' 'net  proceeds. ' '  Some  use  the  term  in  the  sense  of  net 
profits.  The  representatives  of  the  mining  industry  are  vig- 
orous in  drawing  a  distinction  between  net  proceeds  and  net 
profits,  but  they  give  no  definition  of  the  former.1  It  is  neces- 
sary to  attempt  an  elucidation  of  the  term  in  order  to  free  the 
discussion  of  obscure  elements. 

The  modern  science  of  accounting  does  not  use  the  term  "net 
proceeds."  In  any  profit  and  loss  account,  which  a  well  con- 
ducted firm  or  corporation  would  prepare,  the  items  would  in- 
clude gross  earnings,  cost  of  manufacture  or  operation,  gross 
profits,  net  profits,  fixed  charges,  etc.  Of  course  the  form  of 
accounting  is  usually  adjusted  to  each  particular  business  in 
order  to  express  the  essential  facts.  Accountants  strive  to  main- 
tain flexibility  in  their  systems,  and  the  forms  used  by  them 
vary  from  business  to  business.2  But  there  is  a  general  scheme 
which  underlies  all  accounting  forms.  An  idea  of  the  essential 
elements  of  an  income  account  may  be  obtained  from  an  exam- 
ination of  the  statements  reproduced  below.  Statement  I  is  the 
income  account  of  the  Westinghouse  Electric  and  Manufacturing 
Company  for  the  fiscal  year  ending  March  31,  1911. 

Gross  Earnings  (shipments  billed) ..$38,119,312.01 

Cost  of  Shipments  (factory  costs  including  all  expenditures 
for  patterns,  dies,  new  small  tools,  and  other  better- 
ments and  extensions ;  also  inventory  adjustments  and 
all  selling,  administrative,  general  and  development 
expenses)  32,510,546.87 

Net  Manufacturing   Profits $  5,608,765.14 

1  L.  O.  Evans,  Butte  Miner,  March  14,  1918. 

2  H.  R.  Hatfleld,  Modern  Accounting,  p.  278. 

49 


50  MINE  TAXATION  IN  MONTANA 

Other  Income: 

Interest  and  Discount 272,055.25 

Dividends  and  Interest  on  Sundry  Stocks  and  Bonds 

Owned    615,299.40 

Miscellaneous  Royalties,  etc 628,177.13 


$  1,515,531.81 

Total  Income  $  7,124,296.95 

Deductions  from  Income: 

Interest  on  Bonds  and  Debentures $  1,076,553.71 

Interest  on  Collateral  Notes 416,000.00 

Miscellaneous  Interest  92,933.04 

Property  and  Plant  Depreciations  Charged  Against  the 

Income  531,668.19 

Proportion  of  Expenses  Incidental  to  Bond  and  Note 

Issues  76,666.66 

Miscellaneous  209,369.37 


$  2,243,190.97 
Net  Income — Surplus  for  the  Year $  4,881,105.98  1 

Statement  II  is  a  recent  income  statement  of  the  Union  Pacific 
Railroad  Company  which  follows  the  form  prescribed  by  the 
Interstate  Commerce  Commission. 

Freight  Revenue  $59,253,344 

Passenger  Revenue  18,817.047 

Mail,  Express  arid  all  other  Transportation  Revenue 6,726,317 

Incidental  Revenue  2,161,587 


Total  Revenue $86,958,295 


Maintenance  of  Way  and  Structures $10,900,925 

Maintenance  of  Equipment , 12,101,212 


Total  Maintenance $23,002,137 

Traffic  Expenses 2,061,971 

Transportation  Expenses  23,108,140 

Miscellaneous  Operations  Expenses 1,313,189 

General  Expenses  2,811,421 

Transportation    for    Investment-credit 160,143 


Total  Operating  Expenses $52,136,715 

Taxes  ...  4,641,474 


Total  Operating  Expenses  and  Taxes $56,778,474 


Revenues  over  Operating  Expenses  and  Taxes $30,180,106 

Other  Operating  Income 1,296,138 


1  Ch.  W.  Gerstenberg,  Materials  of  Corporation.  Finance,  pp.  629-30. 


WHAT  IS  "NET  PROCEEDS"  51 

Total  Operating  Income $31,456,244 

Fixed  and  Other  Charges 15,028,285 


Surplus  from  Transportation  Operations  after  deducting  all 

Fixed  and  Other  Charges $16,427,959 

Income  from  Investment  and  Other  Sources 11,964,064 


Total  Surplus  $28,392,023 

Less  Dividends  on  Preferred  Stock  at  4%  per  Annum 3,981,740 


Surplus  after  Deducting  Dividend  on  Preferred  Stock $24,410,283 

Equivalent  on  Common  Stock  to 10.98% 

Amount  Required  to  pay  Dividend  on  Common  Stock  at  rate 

of  8%  per  Annum 17,783,328 


Surplus  after  Deducting  all  Fixed  and  Other  Charges  and 

Dividends  on  Preferred  and  Common  Stock $  6,626,955 

An  analysis  of  the  above  two  statements  shows  the  essential 
elements  of  any  profit  and  loss  account.  A  well  known  writer 
on  corporation  finance  has  presented  them  in  the  following 
abstract  form: 

1.  State  gross  earnings. 

2.  Deduct   operating  or  manufacturing  expenses  including 
selling,  administrative,  maintenance,  and  depreciation. 

3.  The  result  is  net  earnings  from  operation. 

4.  Add  income  from  other  sources. 

5.  The  result  is  total  net  income. 

6.  Deduct  taxes',  interest,  rentals,  sinking  fund  charges,  and 
other  fixed  charges. 

7.  The  result  is  surplus  for  the  year  applicable  as  earnings 
on  shareholdings. 

8.  Deduct  preferred  dividends. 

9.  Deduct  common  dividends. 

10.     The   result  is  surplus  from   the  year's  operation   to   be 
credited  to  surplus1  account.1 

Necessarily,  the  character  of  the  statement  will  depend  upon 
what  is  included  in  each  item.  The  Westinghouse  Company, 
for  instance,  includes  betterments  and  extensions  in  its  manufac- 
turing costs.  Accountants  generally  agree  that  betterments  and 
extensions  which  are  of  a  "substantial  and  permanent  character" 

1  William  H.  Lough,  Business  Finance,  pp.  417-8. 


52  MINE  TAXATION  IN  MONTANA 

should  be  included  in  capital  account.1  This  is  an  item  which 
varies  frequently.  The  other  items  are  more  or  less  alike  in  all 
statements. 

Regardless  of  the  differences  in  the  nature  of  the  mining  in- 
dustry, the  income  statements  of  the  principal  mining  corpora- 
tions of  the  country  differ  but  slightly,  if  at  all,  from  the  gen- 
eral form  outlined  above.  For  purposes  of  illustration  it  is 
desirable  to  present  statements  of  several  mining  companies. 

RAY  CONSOLIDATED   COPPER    COMPANY. 

Statement  of  Operations  for  the  year  ended  December  31,  1917. 
Operating  Revenue: 

Copper  produced  $21,246,999.16 

Silver  produced  6,518.46 

Gold  produced 24,553.28 


$21,278,070.90 
Operating  Expenses: 

Mining  and  Milling .' $  7,053,242.72 

Treatment,  Refining,  and  Freight 3,586,419.08 

Selling  Commission  _ 214,312.92 

Mine  Development  Extinguishment 445,440.50 


$11,299,415.22 
Net  Income  from  Operation  plus  Depletion $  9,978,655.28 

Miscellaneous  Income: 

From  Investments  $      572,481.46 

Sundry  Income  65,165.68 


$     437,647.14 

$10,416,302.82 
Other  Charges: 

For  Plant  Alterations,  Replacements  and  Abandonments  $      521,081.68 
For  Adjustment  of  Charges  to  Development  Account....        194,051.20 


$      715,133.08 

Balance  to  Surplus  Account $  9,701,169.74 

Surplus  from  Operations. 

Balance  December  31,  1916 $13,813,177.68 

Net  Income  and  Proceeds  of  Depletion 9,701,169.74 


$23,514,347.42 
1  Hatfield,  op.  cit.,  p.  73. 


WHAT  IS  "NET  PROCEEDS"  53 

Dividends   $  5,835,562.30 

Capital  Distribution  788,589.50 

$  6,624,151.80 


Balance  December  31,  1917 $16,890,195.62 

NEVADA  CONSOLIDATED  COPPER  COMPANY. 

Statement  of  Operations  for  the  year  ended  December  31,  1917. 

Operating  Revenue: 

Copper  produced  $18,484,271.24 

Silver  produced  767,750.41 

Net  Proceeds  from  Sale  of  Carbonate  Ore 27,691,06 


$20,279,722.71 
Operating  Expenses: 

Mining  including  Proportion  of  Shipping  Expense $  3,374,254.87 

Freight  on  Ore 1,101,810.20 

Milling  3,039,442.35 

Smelting   2,161,279.67 

Depreciation  on  Steptoe  Plant 650,255.20 

Freight  and  Refining 1,112,222.49 

Selling  Commission  196,110.55 

$11,635,375.33 


Net  Income  from  Operations  plus  Depletion $  8,644,347.38 

Miscellaneous  Income: 

Dividends  on  Investments $  825,000.00 

Interest  on  Bonds 33,874.99 

Interest 140,249.77 

Cash  Discounts  on  Purchases 11,978.58 

Rents,  Miscellaneous  Income,  etc 281,147.95 


$  1,293,251.29 

Total  from  all  sources — to  surplus  account $  9,937,598.67 

Surplus  from  Operations. 

Balance  December  31,  1916 $12,353,643.04 

Net  Income  and  Proceeds  of  Depletion 9,937,598.67 


$22,291,241.71 

Ore  Extinguishment— 12  Months  ended  December  31,  1917.. $12,353,643.04 

Depreciation  of  Mine  Equipment 39,597,34 

Plant  Alterations,  Replacements,  and  Abandonments 528,705.95 

Dividends   7,298,018.05 

Capital   Distribution   999,728.10 


$  9,110,715.00 
Balance    December  31,  1917....  ....$13,180,525.00 


54  MINE  TAXATION  IN  MONTANA 

BUTTE  AND   SUPERIOR  MINING   COMPANY 

Comparative  Income  Account  for  1917. 

Income: 

Spelter,  Zinc  and  Lead  Concentrates  and  Residues $  7,817,674.25 

Less  Freight  1,100,237.11 


$  6,716,437.14 
Operating  Costs  and  Expenses: 

Mining  $  2,537,575.70 

Milling  1,265,312.27 

Other  Charges,  Shut  Down  Expenses,  etc 566.053.29 


Total  Operating  Costs  and  Expenses $  4,368,941.26 


Gross  Profits  on  Operations $  2,347,495.88 

Reserves  for  Depreciation  and  Depletion    $  1,941,129.65 


Net  Profits  on   Operation $   406,366.22 

Other  Income  ...  103.191.03 


Total  Income  $     509.557.25 

Reserve  for  Excess  Profits    and    Income    Taxes,    Contin- 
gencies, etc 236.646.72 


Net  Income $     272,910.53 

The  above  statements  agree  in  essentials.  None  of  them  con- 
tain the  term  "net  proceeds'. "  It  is  not  merely  a  matter  of 
terminology.  There  is  in  fact  no  single  item  in  any  of  the  above 
income  accounts  which  exactly  corresponds  to  what  is  termed 
"net  proceeds"  in  the  Montana  law.  This  can  be  made  clearer 
by  presenting  in  outline  form  the  statement  of  net  proceeds  which 
the  owner  of  a  Montana  mine  is  required  to  make.  It  is  as 
follows : 

Statement  of  Net  Proceeds: 

State  gross  yield  or  value  (number  of  tons  at per  ton  of  ore). 

Deduct:     1.  Total  cost  of  extracting  and  milling; 

2.  Total  cost  of  transportation  to  place  of  reduction  or  sale ; 

3.  Total  cost  of  reduction ; 

4.  Cost  of  selling; 

5.  Total  cost  of  improvements  on  buildings  and  in  the 
workings  of  the  mine. 

6.  Total  cost  of  construction  of  mills  for  mines  and  of 
reduction  works  used  and  operated  in  connection  with 
mines  (which  were  built  during  the  year). 

Add:    Salaries  of  persons  or  officers  not  actually  engaged  in  the 

working  of  the  mine; 
The  result  is — Net  Proceeds. 


WHAT  IS  "NET  PROCEEDS"  55 

It  is  clear  that  the  "net  proceeds'"  in  the  above  statement 
are  computed  in  a  manner  which  is  not  followed  by  any  mining 
company  in  its  ordinary  accounting.  The  Montana  law  allows 
a  full  deduction  of  all  improvements  and  extensions  made  in 
any  one  year,  but  it  does  not  include  in  operating  expenses 
salaries  of  officers  not  engaged  in  the  workings  of  the  mine. 
Net  proceeds  cannot,  therefore,  correspond  to  net  operating 
profits'.  For  the  same  reason,  net  proceeds  cannot  agree  in  any 
one  year  with  '  *  net  income. ' '  The  Montana  law  provides  for  the 
extinguishment  of  all  capital  expenses  made  in  any  one  year. 
The  general  method  of  accounting  consists  in  deducting  depre- 
ciation and  depletion  charges  gradually  during  a  number  of 
years. 

In  the  long  run,  however,  it  would  seem  that  the  effect  of  the 
Montana  law  is  to  make  net  proceeds  correspond  more  or  less  to 
net  income.  An  examination  of  the  income  statements  of  the 
various  mining  companies  presented  above  shows,  that  if  one 
should  sum  up  the  "net  income  from  operations"  for  the  entire 
life-period  of  a  mine  and  then  deduct  from  that  sum  the  total 
of  all  depreciation  and  development  charges,  the  result  would 
be  approximately  the  total  "net  proceeds"  of  the  mine  during 
its  entire  life.  The  difference  would  be  the  amount  paid  out 
in  salaries  to  officers  not  actually  engaged  in  the  working  of  the 
mine  and  the  total  amount  of  depletion  charges  which  the  Mon- 
tana law  does'  not  provide  for. 

Even  in  the  long  run,  however,  "net  proceeds"  would  not 
necessarily  equal  total  income.  If  a  mining  company  should 
invest  part  of  its  surplus  for  one  or  more  years  in  some  other 
business,  in  railroad  securities  for  instance,  the  income  from  such 
investments,  though  originally  derived  from  mining  operations, 
would  swell  the  dividends,  but  would  have  no  effect  on  net  pro- 
ceeds. The  latter  would,  therefore,  tend  to  fall  below  the  total 
income.  On  the  other  hand,  for  reasons  indicated  above,  net 
proceeds  would  tend  to  be  above  the  net  operating  income.  If 
properly  and  accurately  accounted  for,  net  proceeds  would, 
therefore,  fall  between  operating  and  total  income  without  quite 
being  equal  to  either. 


56  MINE  TAXATION  IN  MONTANA 

The  peculiar  method  used  for  the  computation  of  net  proceeds 
is  responsible  for  the  divergent  views  on  the  subject  quoted  at 
the  beginning  of  this  chapter.  Strictly  speaking,  net  proceeds 
are  not  net  income.  As  a  matter  of  fact,  in  the  long  run  they 
approach  net  income  from  operation  so  closely  as  to  justify  their 
identification  with  such  net  income. 


CHAPTER  VI. 

THE  ANACONDA  COPPER  MINING  COMPANY. 

No  discussion  of  mine  taxation  in  Montana  would  be  complete 
without  special  consideration  of  the  case  of  the  Anaconda  Copper 
Mining  Co.  In  the  popular  mind  the  mining  industry  in  Montana 
and  the  Anaconda  Copper  Mining  Company  are  identical,  and 
the  facts'  fully  justify  the  dominating  position  which  the  Ana- 
conda Copper  Mining  Company  occupies  in  the  discussion  of 
mine  taxation.  According  to  the  reports  published  annually  by 
the  United  States  Geological  Survey,  the  mines  of  the  Anaconda 
Copper  Mining  Company  produce  nine-tenths  of  all  the  copper, 
about  two-thirds  of  the  silver,  and  a  considerable  part  of  all  the 
gold  of  the  state.  The  figures  for  the  four  years  1913-1916  are 
presented  in  Table  XII,  and  indicate  sufficiently  the  extent  of 
the  mining  operations  of  the  Company. 

TABLE  XII. 


Year 

Copper  in  pounds 

Silver  in  fine  ounces 

Gold  in 
fine  ounces 

Total  in 
state 

Produced  * 
by  A.  C.  M. 
Co. 

Total  in 
state 

By  A.  C. 
M.  Co. 

Total  in 
state 

By  A.  C. 
M.    Co. 

1916 
1915 
1914 
1913 

352.928,373 
267,231.014 
233,229,640 
287,828,699 

307,395,092 
235,076,289 
205,298,531 
241,983,323 

16,494,366 
14,378,437 
12,016,460 
13,819,201 

10,790,705 
8,064,986 
7,221,815 
8,719,132 

220,130 
242,077 
199,203 
168,994 

92,099 
106,702 
99,650 

64,898 

*  Produced  from  the  mines  of  the  Company.     See  reports  on  Mineral 
Resources  by  the  United  States  Geological  Survey,  1913-1917. 

The  dominant  position  of  the  A.  C.  M.  Co.  in  the  mining  in- 
dustry of  Montana  is  also  revealed  by  a  comparison  of  the  net 
proceeds  a&sessed  in  the  state.  The  figures  for  the  fifteen  years 
from  1903  to  1917  are  as  follows: 


57 


58 


MINE  TAXATION  IN  MONTANA 


TABLE  XIII. 


Year 

Total   net   proceeds 
of  mines  assessed 
in  Montana 

Net  proceeds  of 
A.  C.  M.  Co. 
assessed 

Per  cent  of 
total 

1917 

$45,519,461 

$36,010,543 

79.1 

J916 

28,605,355 

14,628,787 

51.1 

1915 

10,855,342 

6,828,160 

62.9 

1914 

11,517,166 

8,613,565 

74.8 

1913 

14,509,695 

11,446,902 

78.8 

1912 

12,116,283 

10,525,730 

86.8 

1911 

6,203,590 

5,097,433 

82.1 

1910 

8,117,602 

6,413,501 

79.0 

1909 

6,983,713 

4,880,355 

69.9 

1908 

4,731,884 

3,374,211 

71.3 

1907 

20,358,119 

16,174,755 

79.4 

1906 

19,264,423 

14,247,111 

73.9 

1905 

10,532,425 

8,692,244 

82.8 

1904 

7,861,624 

6,240,024 

79.3 

1903 

8,056,355 

6,486,532 

80.5 

1 

To  compare  the  burden  of  taxes  borne  by  the  A.  C.  M.  Co.  with 
that  of  other  property  in  the  state,  it  is  convenient  at  first  to 
compare  the  assessment  of  the  Company  with  that  of  other  prop- 
erty. Table  XIV  contains  the  figures  which  bear  upon  the  sub- 
ject for  the  fifteen  years  from  1903  to  1917. 

TABLE  XIV. 


Tear 

Total  assessment 
of  state 

Assessment  of 
A.   C.  M.  Co. 

Per  cent  of 
total 

1917 

$582,286,529 

$55,606,347 

9.5 

1916 

487,898,353 

31,310.903 

6.5 

1915                    439,785,918 

22,356.370 

5.1 

1914 

412,361,919 

24,057,993 

5.8 

1913 

382,807,277 

26,550,066 

6.9 

1912           !         346,550,585 

25,300,178 

7.3 

1911 

331,670,418 

19,724,101 

5.9 

1910                    309,673,699 

19,775,916 

6.3 

1909 

280,401,064 

18,449,940 

6.6 

1908 

248,774,792 

17,483,367 

7.0 

1907 

251,882,437 

28,238,022 

11.2 

1906           |         233,953.571 

26,911,857 

11.5 

1905 

209,912,340 

20,332,451 

9.7 

1904                    201,748,063 

16,426.007 

8.1 

1903 

201.333.310 

16.583,667 

8.2 

This  table  shows  that  the  properties  owned  by  the  A.  C.  M.  Co. 
formed  a  greater  proportion  of  the  total  assessment  of  the  state 
in  1906  and  1907  than  in  any  other  year  of  the  period  under 
consideration.  A  more  uniform  tendency  may  be  discerned  by 
considering  the  average  annual  assessments  for  five-year  periods 
as  shown  in  Table  XV. 


THE  ANACONDA  COPPER  MINING  COMPANY      59 


TABLE  XV. 


Five-year 
period 

Average  annual  as- 
sessment  of   state 

Average  annual  as- 
sessment of  A.  C. 
M.  Co. 

Per  cent  of 
total 

1913-1917 
1908-1912 
1903-1907 

$461,027,999 
303,414.111 
219,765,944 

$31.976,353 
20.146.700 
21,698,401 

6.9 
6.6 
9.9 

The  above  table  shows  that  relatively  to  the  total  assessment 
of  the  state  the  A.  C.  M.  Co.  was  assessed  higher  during  1903-07 
than  since  and  that  the  relative  decrease  in  the  assessment  has 
amounted  to  three  per  cent.  This  is  in  accordance  with  the 
conclusion  reached  in  Chapter  IV  that  mining  property  has 
tended  to  form  a  decreasing  proportion  of  the  total  assessment 
of  the  state. 

The  fluctuations  in  the  annual  assessments'  of  the  A.  C.  M.  Co. 
are  the  result  of  variation  in  the  net  proceeds  of  the  Company. 
For  instance,  in  1913  the  net  proceeds  formed  43  per  cent  of 
the  total  assessment  of  the  Company,  but  in  1915  they  dropped 
to  30  per  cent,  while  in  1916  they  rose  to  64  per  cent.  The  same 
tendency  was  indicated  for  the  assessments  of  the  mining  in- 
dustry as  a  whole  in  Chapter  IV. 

The  assessments  presented  above  are  the  basis  on  which  the 
A.  C.  M.  Co.  has  paid  taxes  during  the  period  considered.  The 
taxes  paid  on  net  proceeds,  timber  lands1,  and  other  property 
during  1913-1917  are  shown  in  Table  XVI. 


TABLE  XVI. 


Total  taxes 

Taxes  paid 

Per 

Taxes  paid 

Taxes  paid 

Year 

paid  by  A.  C. 

on  net 

cent  of 

on  timber 

on  other 

M.  Co. 

proceeds 

total 

lands 

property 

1917 

$2,086,005* 

$1.066,519 

51.1 

$152,991 

$438,117  • 

1916 

979.622 

483,756 

49.4 

141,556 

354,309 

1915 

687,236 

229,520 

33.4 

124,659 

3&3,056 

1914 

675,738 

250,156 

37.0 

127,513 

298,069 

1913 

752,633 

332,338 

44.1 

126,678 

293,617 

*  Includes  $428,376  of  one  per  cent  corporation  license  tax  paid  to  the 
State  of  Montana,  according  to  the  law  passed  in  1917. 


60 


MINE  TAXATION  IN  MONTANA 


The  taxes  indicated  in  the  above  table  were  paid  for  state, 
county,  municipal,  school,  and  all  other  purposes.  By  com- 
paring these  figures  with  the  taxes  paid  in  the  state  on  all  other 
property,  the  proportion  of  the  tax  burden  borne  by  the  A.  C.  M. 
Co.  will  become  evident.  There  is  no  one  report  published  by 
any  of  the  departments  of  our  state  government  which  contains1 
an  exact  statement  of  the  total  taxes  paid  for  all  purposes  in 
Montana  in  any  one  year.  The  figures  given  in  the  following 
tables  are  calculated  on  the  basis  of  the  reports  published  by  the 
State  Examiner,  State  Superintendent  of  Public  Instruction,  and 
other  state  officers.  Some  of  these  figures  were  obtained  from 
the  office  of  the  State  Treasurer.  There  is  no  doubt  that  the 
figures  fall  somewhat  below  the  total  taxes  paid  in  the  state 
and  therefore  make  the  position  of  the  A.  C.  M.  Co.  more  favor- 
able than  it  would  be  if  the  exact  figures  were  known.  The 
figures  given  for  the  A.  C.  M.  Co.  are  exact  and  are  taken  from 
the  pamphlets  published  annually  by  the  Company.  These  fig- 
ures are  arranged  in  the  following  statistical  tables.  Table  XVII 
presents  the  relative  amounts  of  taxes  paid  during  1913-1917  for 
state  purposes  only. 

TABLE  XVII. 


Year* 

Total  taxes  paid  to  the  state 
exclusive   of   corporation 
license  tax 

Corporation   license   tax 

Total  paid 
in  statet 

Amount 
paid  by  A. 
C.  M.  Co. 

Per 
cent  of 
total 

Total  paid 
by  all  cor- 
porations 
in  state 

Amount 
paid  by  A. 
A.  C.  M. 
Co. 

Per 
cent  of 
total 

1917 
1916 
1915 
1914 
1913 

$1,944,806 
1,739,952 
1,735,661 
1,683,437 
1,405,804 

$155,698 
87,671 
62,598 
68,565 
79,650 

8.0 
5.0 
3.6 
4.1 

5.7 

$786,446 

$428,376 

54.5 

Annual 
Average 
for 
1913-1917 

1,701,932 

90,838 

5.3 

*  Fiscal  year  ending  November  30. 

t  These  figures  were  obtained  from  the  records  in  the  office  of  the  State 
Treasurer.  They  include  receipts  from  general  fund,  inheritance  tax, 
and  some  license  taxes.  The  latter  are  not  uniformly  entered  and  are 
therefore  omitted  in  part. 


THE  ANACONDA  COPPER  MINING  COMPANY      61 


The  above  table  shows  that  the  amount  of  taxes  contributed 
by  the  A.  C.  M.  Co.  for  purposes  of  state  government  decreased 
both  absolutely  and  relatively  from  1913  to  1915,  and  increased 
during  1916-17.  The  passage  of  the  corporation  license  tax  law, 
imposing  a  tax  of  one  per  cent  on  the  net  income  of  corporations 
raised  the  amount  of  taxes  paid  by  the  A.  C.  M.  Co.  considerably. 
In  fact,  under  this  law  the  A.  C.  M.  Co.  paid  to  the  state  about 
three  times  as  much  in  license  taxes  as  in  property  taxes.  This 
was  due  to  the  prosperity  of  the  Company  during  the  year  end- 
ing December  31,  1916.  Combining  the  taxes  paid  under  the 
general  levy  and  on  inheritance  with  the  corporation  license  tax 
and  with  $17,358  paid  by  private  car  and  express  companies, 
one  obtains  a  total  of  taxes  paid  for  state  purposes,  equal  to 
$2,748,630  out  of  which  the  A.  C.  M.  Co.  paid  $584,074  or  21.2 
per  cent.  The  corporation  license  tax  has  thus  helped  to  raise 
the  proportion  of  taxes  paid  by  the  A.  C.  M.  Co.  for  state  pur- 
poses from  an  average  of  about  five  per  cent  to  twenty-one  per 
cent ;  that  is,  it  has  increased  it  about  four  times. 

However,  the  property  and  license  taxes  collected  by  the  state 
government  form  but  a  small  part  of  the  total  amount  of  taxes 
collected  in  the  state.  By  far  the  largest  part  is  collected  by 
the  counties,  towns  and  cities  for  purposes  of  county  and  mu- 
nicipal government,  for  the  maintenance  of  schools,  for  the 
building  and  repair  of  roads,  for  charitable  needs,  and  for  all 
other  purposes  which  come  within  the  scope  of  county  and 
municipal  government  in  the  State  of  Montana.  The  total  col- 
lected for  all  these  purposes  and  the  amount  contributed  by  the 
A.  C.  M.  Co.  are  presented  in  Table  XVIII. 

TABLE  XVIII. 


Year 

Total  taxes  paid  for  county,  municipal,  school  and  other 
purposes,  except  for  state  government 

Total  paid  in 
Montana  * 

Total  paid  by 
A.  C.  M.  Co. 

Per  cent  of  total 

1917 
1916 
1915 
1914 

$18,054,405 
15,220,609 
13,515,048 
11,705,037 

$1,501,931 
891.951 
624,638 
607.173 

8.32 
5.86 
4.62 
5.19 

Annual  average 
for 
1914-1917 

14,623,775 

906,423 

6.19 

*  These  figures  were  obtained  by  adding  the  following  items :  (1)  receipts 
from  taxes,  licenses  and  permits,  and  trust  and  agency  payments  to  cities 


62 


MINE  TAXATION  IN  MONTANA 


and  towns  as  reported  by  county  clerks  to  the  State  Examiner;  (2)  re- 
ceipts from  taxes  as  reported  by  the  State  Superintendent  of  Public  In- 
struction; (3)  general  property  taxes  for  Butte,  Missoula,  and  Helena,  as 
obtained  from  respective  city  officials;  (4)  license  taxes  for  Missoula  for 
all  years  and  license  taxes  for  Butte  for  1917  and  1915  as  reported  by 
the  Bureau  of  the  Census.  I  made  several  unsuccessful  attempts  to  ob- 
tain the  figures  for  Great  Falls.  It  was  also  impossible  to  make  a  proper 
estimate  for  1913.  These  figures  do  not  include  improvement  or  other 
special  assessments  or  any  other  government  receipts. 

It  is  possible  on  the  basis  of  the  available  data  to  analyze  more 
fully  the  taxes  paid  specifically  for  school  purposes,  as  is  shown 
in  Table  XIX. 


TABLE  XIX. 


Total  school  taxes 

General  school  taxes 

Special  and  high 

paid  * 

paid 

school  taxes  paid 

Per 

Per 

Per 

Year 

In 

Mon- 
1  ana 

By  A.  C. 
M.    Co. 

cent 
of 
to- 

In Mon- 
tana 

By  A.  C. 
M.  Co. 

cent 
of 
to- 

In Mon- 
tana 

By  A.  C. 

M.  Co. 

cent 
of 
to- 

tal 

tal 

tal 

1917 

$5,993,218 

$680,543 

11.4 

$2,212,961 

$223,569 

10.1 

$3,272,234 

$456,974 

13.9 

1916 

5,167,565 

408,540 

7  9 

1,834,955 

125,243 

6  8 

2,895,261 

283,296 

9  8 

1915 

4,423,608 

276,030 

6.  B 

1,786,319 

89,176 

49 

2,298,147 

186,854 

8.1 

1914 

3,998,175 

265,123 

6.6 

1,588,353 

94,831 

5.9 

2,099,604 

170,291 

8.1 

An- 

nual 

aver- 

1914- 

1917  j    4,895,641 

407,559 

8.3 

1,855,647 

133,205 

7.2 

2,641,311 

274,356 

10.4 

*  Includes  "Apportionment  from  County  Tax,"  "Special  Tax  for  General 
Fund,"  and  "Special  Tax  for  Interest  and  Sinking  Fund"  as  reported  by 
the  State  Superintendent  of  Public  Instruction. 

The  above  two  tables  show  that  the  A.  C.  M.  Co.  paid  from  4.6 
to  8.3  per  cent  of  all  taxes1  other  than  state  taxes  and  from  6.2  to 
11.4  per  cent  of  all  school  taxes.  During  the  four  years  1914-1917 
the  A.  C.  M.  Co.  paid  an  average  of  8.3  per  cent  of  all  school 
taxes.  It  should  be  borne  in  mind  that  by  far  the  greater  part  of 
the  taxes  paid  by  the  A.  C.  M.  Co.  for  county  and  school  purposes 
are  paid  in  the  two  counties  of  Silver  Bow  and  Deer  Lodge.  For 
instance,  in  1917  the  A.  C.  M.  Co.  paid  in  those  two  counties 
$567,704  in  school  taxes  out  of  the  total  of  $680,543 ;  in  other 
words,  over  83  per  cent  of  all  school  taxes'  paid  by  the  A.  C.  M. 
Co.  in  the  state  in  1917  went  to  support  the  schools  in  just  those 
two  counties.  At  least  75  per  cent  of  all  other  taxes  (except 


THE  ANACONDA  COPPER  MINING  COMPANY      63 

those  paid  for  the  support  of  the  state  government)  are  paid  in 
the  same  two  counties. 

In  the  above  tables  all  taxes  paid  in  the  State  of  Montana  were 
segregated  according  to  the  purpose  for  which  they  were  paid. 
A  general  comparison  of  the  total  taxes  paid  for  all  purposes  in 
Montana  is  shown  in  Table  XX. 


TABLE  XX. 


Year 

Total  taxes  paid  for  state,   county,  school  and  other 
purposes 

In  Montana 

By  A.  C.  M.  Co. 

Per  cent  of  total 

1917 
1916 
1915 
1914 

$20,803,000 
16,960.500 
15,250,700 
13.388,475 

$2,086.005 
979,622 
687,622 
675.738 

10.0 

5.8 
4.5 
5.0 

Annual  average! 

for 
1914-1917 


16,600.669 


1,107,247 


6.7 


Table  XX  shows  that  during  the  four  years  1914-1917  the 
A.  C.  M.  Co.  paid  from  5  to  10  per  cent  of  the  total  taxes  col- 
lected in  the  state,  and  that  the  average  for  the  four  years'  was 
6.7  per  cent.  This  then  is  the  measure  of  the  tax  burden  borne 
by  the  A.  C.  M.  Co.  in  the  State  of  Montana.  As  explained  above, 
these  figures  are  conservatively  estimated.  They  are  much  lower 
than  the  estimate  of  the  Temporary  Tax  and  License  Commission, 
whose  report  just  published  estimates  the  total  amount  of  taxes 
collected  in  Montana  in  1917  as  equal  to  $22,950,503.  On  the 
basis  of  this  estimate  of  the  Tax  Commission,  the  A.  C.  M.  Co. 
would  have  paid  in  1917  only  9  per  cent  of  the  total  taxes  col- 
lected in  the  state. 

The  facts  established  by  the  statistical  tables  given  above  make 
it  possible  to  examine  more  closely  the  burden  of  taxation  borne 
by  the  Anaconda  Copper  Mining  Company.  As  explained  in 
Chapter  III,  the  "rule  of  proportion,"  implied  in  the  spirit  and 
demanded  by  the  letter  of  the  law  consists  in  apportioning  taxes 
according  to  the  market  value  of  property  and  in  accordance  with 
ability  as  measured  by  actual  or  potential  earning  capacity.  It 


64  MINE  TAXATION  IN  MONTANA 

is'  legitimate,  therefore,  to  compare  the  taxes  paid  by  the  A.  C.  M. 
Co.  with  its  assets  and  net  income. 

It  must  be  remembered,  however,  that  the  A.  C.  M.  Co.  is  a 
composite  organization  embracing  many  different  kinds  of  prop- 
erty in  a  number  of  states  and  in  different  countries.  The  sub- 
sidiary corporations  of  the  A.  C.  M.  Co.  include  the  International 
Smelting  Company,  the  International  Lead  Refining  Company, 
the  Rantan  Copper  Works,  etc.  Among  its  properties  are  coal 
mines  in  Wyoming,  copper  mines  in  Arizona,  mines  and  railroads' 
in  South  America,  timber  lands  in  Montana,  brick  plants, 
foundries,  etc.  The  annual  reports  published  by  the  Company 
cover  all  these  properties  in  one  balance  sheet  and  in  one  profit 
and  loss  account. 

Nevertheless,  it  is  possible  to  obtain  an  idea  of  the  extent  of 
the  property  and  of  the  operations  of  the  Company  in  Montana. 
As  indicated  above,  the  A.  C.  M.  Co.  in  1917  paid  $428,376  in 
corporation  license  taxes'  to  the  State  of  Montana.  This  amount 
was  one  per  cent  of  the  net  income  of  the  Company  from  opera- 
tions in  Montana  during  the  year  ending  December  31,  1916. 
This  means  that  the  total  net  income  of  the  Company  from  opera- 
tions in  Montana  in  1916  was  at  least  $42,837,600.  The  annual  re- 
port of  the  Company  for  the  year  ending  December  31,  1916, 
gives  the  total  profit  of  the  Company  for  1916  as  $50,828,372. 
It  is  clear  from  these  figures  that  the  A.  C.  M.  Co.  obtained  in 
1916  84.3  per  cent  of  its  total  profits  from  operations  in  Mon- 
tana. 

It  is  also  possible  on  the  basis  of  the  available  data  to  estimate 
the  value  of  the  Company's  property  in  Montana.  The  balance 
sheet  of  the  Company,  as  of  December  31,  1916,  shows  assets 
equal  to  $224,013,841,  itemized  as  follows : 

Fixed  Assets: 

Mines  and  Mining  Claims,  Coal  Mines,  Water  Rights, 

and  Lands  for  Reduction  Works  and  Refineries,  etc.  $  74,687,053 

Buildings   and   Machinery   at   Mines,   Reduction   Works, 

Refineries,  Sawmills,  Foundries,  Waterworks,  etc 47,303,134 

Timber  Lands  1 5,499,957 

Investments  in  Sundry  Companies  not  entirely  owned 18,936,375 


$146,426,520 


THE  ANACONDA  COPPER  MINING  COMPANY      65 


Current  Assets: 

Supplies  on  hand  and  Expenses  paid  in  advance $    7,317,431 

Merchandise  held  for  sale 978,230 

Metals  in  process  and  on  hand — in  process,  at  cost;  on 

hand,  sold  at  contract  prices 37,225,804 

Accounts  Receivable  and  Cash 32.065,854 


$  77,587,320 
$224,013,841 

In  a  careful  and  most  penetrating  analysis  of  the  financial 
statement  of  the  A.  C.  M.  Co.  for  1916,  Mr.  W.  R.  Ingals  has 
placed  approximate  values  on  the  various  properties'  of  the  Com- 
pany.1 According  to  Mr.  Ingals,  the  mines  and  the  metallurgical 
plants  of  the  Company  in  Montana  are  worth  at  least  $47  per 
share  which  would  mean  a  total  value  of  $109,568,750.  The 
foundries,  brick  yards,  lumber  mills  and  public  utilities  are 
estimated  at  $3,650,000.  The  timber  lands  of  the  Company  are 
reported  at  $5,499,957.  Deducting  the  investments  outside  Mon- 
tana from  the  total  reported  value  of  investments',  one  obtains  a 
value  of  about  $5,000,000  for  investments  in  Montana,  such  as 
the  shares  of  Butte  and  Superior,  etc.  The  total  of  all  the  fig- 
ures quoted  above  is  equal  to  $123,718,707.  The  mining  plants 
(surface  works)  are  estimated  at  $9,400,000.  Thus,  even  remain- 
ing within  the  limits  of  the  most  conservative  estimates,  one 
must  place  the  value  of  the  properties  held  by  the  A.  C.  M.  Co. 
in  Montana  at  from  $124,000,000  to  $130,000,000.  This  means 
that  the  Company  owns  at  least  85  per  cent  of  its  fixed  assets 
in  Montana.  Applying  the  same  proportion  to  total  assets  would 
result  in  a  valuation  of  about  $190,000,000  for  the  total  assets 
of  the  Company  owned  in  Montana. 

As  the  properties  held  by  the  A.  C.  M.  Co.  outside  Montana 
have  been  acquired  gradually  during  the  past  five  or  six  years, 
the  proportion  of  the  Montana  assets  of  the  Company  to  its 
total  assets  must  have  been  larger  in  the  years  preceding  1916. 
But  assuming  that  the  proportion  has1  been  the  same  and  taking 
the  minimum  (i.  e.,  85  per  cent)  and  keeping  in  mind  also 
that  the  assessments  for  1917  correspond  most  nearly  to  assets 

1  W.  R.  Ingalls,  "Anaconda's  Finances,"  Engineering  and  Mining  Jour- 
nal June  16,  1918. 


66 


MINE  TAXATION  IN  MONTANA 


reported  as  of  December  31,  1916,  one  may  compare  the  assess- 
ments of  the  Company  with  its  assets  in  the  following  table. 


TABLE  XXI. 


Year 

Total  assets 
of  A.C.M.  Co. 

Total  as- 
sessment of 
A.C.M.  Co. 

Per  cent  of 

assessment 
of  total  assets 

Estimated 
assets  owned 
in   Montana 

Per  cent  of 
assessment 
of  assets 
owned  in 
Montana 

1916-17 
1915-16 
1914-15 
1913-14 

$224,013,8-11 
174,785,526 
141,400,798 
124,559,174 

$55.606,347 
31,310.993 
22,356.370 
24,057.993 

24.9 
17.9 
15.8 
19.3 

$190,411,764 
148,567,697 
120,190,678 
105,875,297 

29.2 
21.1 
18.6 
22.7 

Average 
1914-17 

166,189,835 

33,332,926 

20.1 

141,261,359 

23.6 

Table  XXI  shows  that  during  the  four  years  1914-1917  the 
A.  C.  M.  Co.  was  assessed  at  from  18.6  to  29.2  per  cent  of  its 
total  estimated  assets  owned  in  Montana,  and  that  the  average 
annual  assessment  of  the  Company  for  this  period  was  23.6  per 
cent.  It  is  generally  agreed  that  the  financial  policies  of  the 
A.  C.  M.  Co.  are  very  conservative  and  that  its  reported  assets 
are  undervalued  rather  than  overstated.  In  view  of  this,  the 
reported  assets1  may  be  taken  as  the  approximate  value  of  the 
properties  owned  by  the  Company,  and  its  assessments  appear 
thus  to  have  averaged  23.6  per  cent  of  estimated  true  value 
during  1914-1917.  It  should  also  be  noted  that  while  the  net 
income  of  the  A.  C.  M.  Co.  in  1916  from  operations  in  Montana 
was  $42,837,600,  its  total  assessment  in  1917  was  $55,606,347; 
that  is,  the  total  assessment  was  only  $12,768,747  more  than  its 
income  for  the  year.  In  other  words,  the  net  income  of  the  Com- 
pany was  about  77  per  cent  of  its  total  assessment. 

More  significant  than  the  comparison  of  assessments  and  as- 
sets are  the  parallels  drawn  in  the  following  table  between  taxes 
paid  and  the  items  of  importance  in  the  income  account  of  the 
Company.  The  items  selected  are  dividends  paid  and  total  net 
income.  The  term  net  income  in  this  table  and  throughout  this 
chapter  means  net  profits  obtained  after  deducting  from  total 
income  all  fixed  charges. 


TEE  ANACONDA  COPPER  MINING  COMPANY      67 

TABLE  XXII. 


Total  for  the 

Items 
Compared 

1916-1917 

1915-1916 

1914-1915 

1913-1914 

four  years 
from 
1913-14 

to  1916-17 

Taxes   paid   by 

A.  C.  M.  Co  

$  2,086,005 

$      979,622 

$     687,236 

$      675,738 

$  4,428,601 

Total  net  in- 

come of  A.  C. 

M    Co. 

50,878,372 

16,695,807 

8,789,588 

11,323,498 

87,687,265 

Dividends   paid 

by  A.  C.  M.  Co. 

17,484,375 

9,325,000 

9,077,500 

12.997,500" 

48,884,375 

Taxes  paid  per 

$100  of  income 

4.10 

5.87 

7.80 

5.97 

5.05 

Taxes  paid  per 

$100  of  divid'ds 

11.93 

10.50 

7.51 

5.19 

9.06 

The  figures  in  the  above  table  show  the  taxes  paid  for  the  fiscal 
year  ending  November  30,  while  the  income  and  dividends  are 
computed  for  the  year  ending  December  31.  For  instance,  the 
A.  C.  M.  Co.  paid  $2,086,005  in  taxes  for  the  year  ending  No- 
vember 30,  1917,  while  the  profits  of  $50,878,372  and  the  divi- 
dends of  $17,484,375  were  for  the  year  ending  December  31, 
1916.  As  the  A.  C.  M.  Co.  charges1  all  taxes  paid  to  general 
operating  expenses,  it  might  be  thought  more  proper  to  compare 
taxes  paid  to  November  30,  1917,  with  profits  made  during  the 
year  ending  December  31,  1917,  and  make  similar  comparisons 
for  the  preceding  years.  On  the  other  hand,  the  assessment  of 
the  A.  C.  M.  Co.  on  which  it  is  taxed  is  made  between  March  1 
and  June  1  of  each  year,  and  presumably  its  assessment  then 
corresponds  more  closely  with  the  items  in  its  financial  report 
as  of  December  31  of  the  preceding  year.  The  corporation  li- 
cense tax  is  collected  on  the  income  declared  by  the  Company  for 
its  fiscal  year  preceding.  In  view  of  this  condition,  it  was  con- 
sidered advisable  to  adopt  the  procedure  followed  in  Table  XXII. 
However,  if  comparisons'  were  made  between  taxes  and  income 
for  the  same  calendar  year,  the  results  would  be  less  favorable 
to  the  A.  C.  M.  Co.,  as  may  be  seen  from  the  following  table. 


68 


MINE  TAXATION  IN  MONTANA 


TABLE  XXIII. 


Items   compared 

1917 

1916 

1915 

1914 

1913 

Total  for 
five  years 
1913-1917 

Taxes  paid   by  A.  C.  M.  Co. 
for  year  ending  Nov.  30.... 
Net  income  of  A.  C.  M.  Co. 
for  year  ending  Dec.  31.... 
Dividends  paid  by  A.  C.  M. 
for  year  ending  Dec.  31.... 
Taxes  paid  per  $100  of 
income     

$2,086,005 
34,333,751 
19,815,625 
6.07 
10.52 

$    979,622 
50,878,372 
17,484,375 
1.93 
5.61 

$    687,236 
16,695,809 
9,325,000 
4.12 
7.37 

$  675,738 
8,789,588 
9,077,500 
7.60 

7.44 

$    752,633 
11,323,498 
12,997,500 
6.65 
5.79 

5,181,234 
121,971,017 
68,700,000 
4.25 
7.55 

Taxes  paid  per  $100  of 
dividends 

According  to  Table  XXII,  the  A.  C.  M.  Co.  paid  in  taxes  an 
average  of  5  per  cent  of  its  income  and  9  per  cent  of  its  dividends 
during  the  four  years  1914-1917.  Table  XXIII,  computed  as 
explained  above,  reduces  the  average  to  4.25  per  cent  of  income 
and  7.5  per  cent  of  dividends.  One  may  reconcile  both  tables  by 
saying  that  the  A.  C.  M.  Co.  paid  in  taxes  during  the  period 
under  consideration  an  average  of  4  to  5  per  cent  of  its  net 
income  and  of  7  to  9  per  cent  of  its  dividends.  The  two  tables 
also  show  that,  no  matter  how  the  computation  is  made,  the  taxes 
paid  by  the  A.  C.  M.  Co.  since  1915  have  been  less  in  proportion 
to  the  profits  of  the  Company  than  the  taxes  paid  during  1913-14. 
If  the  corporation  license  tax  law  had  not  been  passed,  the  Com- 
pany would  have  paid  in  1917,  $1,657,629  in  taxes1,  which  would 
have  amounted  to  3.25  per  cent  on  its  profits  of  1916  or  4.82  per 
cent  of  the  profits  of  1917.  The  corporation  license  tax,  which 
amounted  to  $428,376,  increased  the  total  taxes  of  the  Company 
sufficiently  to  more  than  equal  6  per  cent  of  the  net  income  and 
10.5  per  cent  of  the  dividends  in  1917,  and  also  raised  in  a  cor- 
responding degree  the  averages  for  the  five  years  1913-1917. 

The  figures  in  Tables  XXII  and  XXIII  compare  the  taxes 
paid  by  the  A.  C.  M.  Co.  with  its  total  net  income  or  profits'. 
But  a  portion  of  this  income  is  derived  by  the  Company  from 
operations  outside  Montana.  As  pointed  out  above,  the  income 
of  the  A.  C.  M.  Co.  from  operations  in  Montana  during  the  year 
ending  December  31,  1916,  was  84.3  per  cent  of  its  total  income. 
It  was  also  indicated  above  why  it  is  s'afe  to  assume  the  same 
proportion  of  income  from  operations  in  Montana  to  total  in- 
come for  the  five  years'  1913-1917.  Applying  this  assumption  to 
the  figures  of  Tables  XXII  and  XXIII,  one  finds  that  during 


THE  ANACONDA  COPPER  MINING  COMPANY      69 


1913-1917  the  A.  C.  M.  Co.  paid  in  taxes  an  average  of  5  to  6 
per  cent  of  its  income  derived  from  operations  in  Montana.  In 
1917  the  A.  C.  M.  Co.  reported  to  the  state  treasury  that  its 
income  from  operations  in  Montana  (during  the  year  ending 
December  31,  1916)  was  $42,837,600  on  which  the  corporation 
license  tax  was  paid.  As  the  Company  in  1917  paid  $2,086,005 
in  total  taxes,  this  would  mean  that  the  Company  in  that  year 
paid  in  taxes  4.87  per  cent  of  its  net  income  from  operations'  in 
Montana. 

The  taxes  paid  by  the  A.  C.  M.  Co.  may  be  analyzed  in  yet 
another  way  which  throws  additional  light  on  the  Montana  meth- 
od of  mine  taxation.  The  comparison  is  presented  in  the  follow- 
ing table: 

TABLE  XXIV. 


A.  C.  M.  Co. 

1917 

1916 

1915 

1914 

1913 

1913-1917 

Net  proceeds  assessed.. 
All  other  property  as- 
sessed,   exclusive    of 
net  proceeds 

$36,010,543 
19,595,804 

$14,628,787 
16,682,206 

$6,828,160 
15,528,210 

$8,613,565 
15,444,428 

$11,446,902 
15,103,164 

$77,527,957 
82,353,812 

Taxes  paid  on  net  pro- 
seeds    

1,066,519 

483,756 

229,520 

250,156 

332,338 

2,362,289 

Taxes  paid  on  all  other 
property,   exclusive  of 
net    proceeds 

1  019  485* 

495,866 

457,716 

425,582 

420,295 

2,818,944 

Taxes  per  $100   of  net 
proceeds 

2.95 

3.30 

3.36 

2.90 

2.90 

3.04 

Taxes  per  $1,000  of  all 
other  property  assessed 

50.2 

29.7 

29.4 

27.5 

27.8 

32.9 

*  Includes  $428,376  of  corporation  license  tax. 


The  significance  of  the  above  table  lies  in  the  fact  that  it 
shows  that  the  A.  C.  M.  Co.  paid  about  the  same  number  of  mills 
on  net  proceeds  as  on  all  other  property.  If  the  interpretation 
of  net  proceeds  given  in  Chapter  V  is  correct  and  net  proceeds1 
approach  net  income,  it  is  evident  that  the  A.  C.  M.  Co.  is  assessed 
at  practically  the  same  rate  on  its  general  property  and  on  its 
annual  income  from  the  mines. 

This,  then,  is  the  burden  of  taxation  borne  by  the  Anaconda 
Copper  Mining  Company  in  Montana.  How  does  this  record 
compare  with  that  of  other  property  in  the  state?  Comprehen- 
sive comparisons  are  impossible  because  no  figures  are  available 
showing  the  market  value  and  net  income  of  other  classes  of 
property.  The  Tax  and  License  Commission,  however,  has  col- 


70 


MINE  TAXATION  IN  MONTANA 


lected  some  data  which  permit  a  few  specific  comparisons.  They 
are  presented  in  Table  XXV  for  the  year  1917. 


TABLE  XXV. 


Properties   compared 

Net    income 
in   Montana 

Taxes  paid 
in   Montana 

Per  cent  of 
income 

A.  C.  M.  Co  

$42,837,600* 

$2,086,005 

4.87 

Northern  Pacific  R.  R.  Co. 

f 

942,409$ 

Chicago,  M.  &  St.  Paul  R.  R. 

t 

555  256$ 

Great  Northern  R  R  Co 

•j- 

1  024  617$ 

Electric  Utilities 

6,649,610 

414,116 

623 

Water  Companies 

528,506 

69697 

1319 

Gas  Plants  

102,512 

13,851 

13.51 

Street  Railways    ...        .    . 

184,773 

46,523 

25.18 

*  Earned  during  year  ending  December  31,  1916. 
t  Not  available. 

$  Based  on  property  taxes  paid  in  1916  and  corporation  license  tax  paid 
in  1917. 

The  above  table  compares  the  taxes  paid  by  the  A.  C.  M.  Co. 
in  1917  with  the  income  received  for  the  year  ending  December 
31,  1916.  This  is  based  on  the  fact  that  the  assessment  of  prop- 
erty in  Montana  is  made  as  of  March  first,  and  net  proceeds  are 
reported  for  the  year  ending  May  31.  Besides,  the  corporation 
license  tax  for  1917  is  based  on  the  net  income  of  the  preceding 
fiscal  or  calendar  year.  But  in  order  to  avoid  any  possible  dif- 
ficulties in  the  above  table,  the  taxes  paid  by  the  A.  C.  M.  Co. 
for  the  fiscal  year  ending  November  30,  1917,  may  be  compared 
with  the  income  of  the  Company  for  the  year  ending  December 
31,  1917.  According  to  the  report  of  the  Company,  its'  income 
for  1917  was  $34,333,751.  Assuming  that  the  proportion  of  the 
income  derived  from  operations  in  Montana  was  the  same  as  in 
1916,  the  income  for  1917  in  Montana  was  $28,840,350.  As  the 
Company  paid  $2,086,005  in  taxes  for  the  year  ending  November 
30,  1917,  the  proportion  of  taxes  to  income  calculated  on  the 
basis  of  operations  for  the  year  ending  December  31,  1917,  would 
equal  7.23  per  cent.  In  either  case,  the  figures  would  seem  to 
indicate  that  the  A.  C.  M.  Co.  paid  in  1917  less  taxes  in  propor- 
tion to  its  income  than  some  of  the  public  utilities. 

No  such  data  as  were  presented  above  for  the  public  utilities 


THE  ANACONDA  COPPER  MINING  COMPANY      71 

are  available  for  city  real  estate,  farming  property,  livestock, 
etc.  Nevertheless,  an  approximate  comparison  between  the  A. 
C.  M.  Co.  and  such  property  is  possible.  It  was  indicated  above 
that  the  total  assessment  of  all  property  in  Montana  was  $582,- 
286,529  in  1917 ;  $487,898,355  in  1916 ;  $439,785,918  in  1915 ;  and 
$412,361,919  in  1914.  During  these  four  years,  the  total  amount 
of  taxes  paid  in  the  state  for  all  purposes  was  $20,803,000  in 
1917;  $16,960,500  in  1916;  $15,250,700  in  1915;  and  $13,388,475 
in  1914.  Deducting  the  taxes  paid  by  the  A.  C.  M.  Co.  during 
these  years,  one  finds  that  all  other  property  in  the  state  (exclu- 
sive of  that  owned  by  the  A.  C.  M.  Co.)  paid  in  taxes  $18,716,995 
in  1917;  $15,980,878  in  1916;  $14,563,464  in  1915;  and  $12,712,- 
737  in  1914.  Deducting  also  from  the  total  assessed  valuation  of 
the  state  the  assessment  of  the  A.  C.  M.  Co.,  one  obtains  the  fig- 
ures showing  that  all  property  in  the  state,  exclusive  of  that  held 
by  the  A.  C.  M.  Co.,  was  assessed  at  $526,680,182  in  1917;  $456,- 
587,362  in  1916 ;  $417,429,548  in  1915 ;  and  at  $388,309,926  in 
1914.  Dividing  the  amount  of  taxes  paid  by  the  assessments 
gives  the  average  rate  for  all  property  in  the  state,  exclusive  of 
the  A.  C.  M.  Co.  The  figures  are  3.55  per  cent  in  1917 ;  3.50  per 
cent  in  1916 ;  3.45  in  1915 ;  and  3.27  in  1914 ;  in  other  words,  all 
property  in  the  state,  exclusive  of  the  property  owned  by  the 
A.  C.  M.  Co.,  paid  35.5  mills'  in  1917 ;  35  mills  in  1916 ;  34.9  mills 
in  1915 ;  and  32.7  mills  in  1914 ;  an  average  of  34.5  mills  annually 
during  the  four  years.  The  Tax  Commission  in  its  report  to 
the  Legislature  estimates  the  average  tax  levy  in  the  state  as 
equal  to  37.3  mills.  This  again  indicates  that  all  estimates  in 
this  chapter  have  been  made  as  conservatively  as  possible. 

It  is,  of  course,  a  matter  of  common  knowledge  that  property 
throughout  the  state  is  assessed  not  at  its  full  cash  value,  as 
required  by  law,  but  at  a  greater  or  less  percentage  of  such 
value.  Various  classes  of  property  are  affected  in  different  de- 
grees by  the  arbitrary  administrative  procedure.  It  is  claimed 
that  agricultural  land  is  assessed  at  35  per  cent  of  its 
value;  cattle  at  45  per  cent;  horses  and  mules  at  52  per 
cent;  bank  stock  at  65  per  cent  of  its  value.  In  1912  the 
Bureau  of  the  Census  estimated  that  real  property  and  improve- 
ments in  Montana  were  assessed  at  43.5  per  cent  of  their  true 
value.  Intangible  property  largely  escapes  assessment  altogether. 


72  MINE  TAXATION  IN  MONTANA 

No  average  for  all  property  in  the  state  would  be  of  much  value 
because  of  the  wide  variations  in  the  assessments  of  the  different 
classes  of  property. 

Confining  the  comparison  to  land  and  livestock,  it  is  clear  that 
the  average  number  of  mills  paid  in  taxes  in  Montana,  as  calcu- 
lated above,  must  be  divided  by  about  three  or  two  and  a  half, 
in  order  to  obtain  the  number  of  mills  paid  on  the  actual  cash 
value  of  such  property.  Such  a  calculation  shows  that  land  and 
livestock  in  Montana  paid  from  12  to  14  mills  on  true  value  in 
1917,  1916,  and  1915 ;  and  from  11  to  13  mills  in  1914 ;  an  average 
of  12  mills'  for  the  four  years,  for  both  agricultural  land  and 
livestock. 

To  compare  fully  the  results1  obtained  as  to  the  assessment  and 
taxation  of  property  in  general  and  of  the  A.  C.  M.  Co.  in  par- 
ticular, the  property  taxes  calculated  above  must  be  reduced  to 
an  income  basis.  It  is  hardly  necessary  to  say  that  such  a  task 
cannot  be  carried  out  in  an  exact  way  in  the  present  state  of 
statistical  data.  All  that  can  be  done  is  to  attempt  an  estimate 
based  on  the  generally  known  facts.  Assuming  that  different 
classes  of  property  in  Montana  produce  incomes  varying  from 
6  to  20  per  cent  on  the  investment,  it  would  follow  that  an 
average  of  12  mills  on  the  true  value  of  property  would 
result  in  the  payment  of  a  tax  equalling  from  7  to  30  per 
cent  of  the  income  from  the  property.  The  percentage  would 
vary  with  the  nature  of  the  property.  Intangible  property,  for 
instance,  probably  pays  a  low  proportion  in  taxes  by  evading  the 
assessor.  In  the  case  of  farming  property,  especially  that  owned 
by  the  farmer  of  moderate  means,  the  proportion  of  income  paid 
in  taxes  is  undoubtedly  much  higher.  If  the  average  income  from 
property  in  the  state  is  10  or  12  per  cent,  then  property  in  Mon- 
tana pays  from  10  to  12  per  cent  of  its  income  in  taxes.  These 
estimates  are  in  agreement  with  the  general  facts  established  for 
the  country  as  a  whole.  It  is  generally  thought  that  the  people 
of  the  United  States  pay  from  15  to  20  per  cent  of  their  income 
for  governmental  expenditures,  and  that  the  major  part  of  such 
taxes  is  paid  for  state  and  local  purposes.1  It  is  also  recognized 

1  H.  R.  Seager,  Principles  of  Economics,  p.  476. 


THE  ANACONDA  COPPER  MINING  COMPANY      73 

that  the  general  property  tax  falls  most  heavily  upon  farming 
property. 

All  the  calculations'  made  in  this  chapter  can  be  summarized 
in  a  few  lines.  During  the  five  years,  1913-1917,  the  average  as- 
sessment of  the  A.  C.  M.  Co.  was  6.6  per  cent  of  the  total  assess- 
ment of  the  state,  and  the  Company  paid  6.7  per  cent  of  all  taxes 
collected  in  the  state.  The  Company  was  assessed  at  about  25 
per  cent  of  the  true  value  of  all  its  properties  in  Montana,  while 
agricultural  land  is  reported  to  have  been  assessed  at  35  per  cent, 
livestock  at  45,  bank  stock  at  60.  During  the  same  period  the 
A.  C.  M.  Co.  paid  about  the  same  number  of  mills  on  its1  assess- 
ment as  all  other  property  in  the  state ;  but  the  A.  C.  M.  Co.  paid 
only  about  8  mills  on  the  estimated  true  value  of  its  Montana 
properties,  while  all  other  property  paid  on  an  average  of  12 
to  14  mills.  And  finally,  the  A.  C.  M.  Co.  paid  in  taxes  to  the 
state  about  6  per  cent  of  its  income  derived  from  operations  in 
Montana,  \vhile  other  property,  especially  farming  property,  paid 
an  average  of  10  to  12  per  cent.  This  then  is  the  comparative 
tax  burden  in  Montana  in  so  far  as'  it  can  be  measured  on  the 
basis  of  available  data. 


CHAPTER  VII. 
THE  DEFECTS  IN  THE  MONTANA  MINE  TAX  LAW. 

The  analysis  of  the  Montana  method  of  mine  taxation  pre- 
sented in  the  preceding  chapters  was  an  attempt  to  make  clear 
the  effects  of  the  law  in  its  concrete  application  in  the  state.  It 
seems  desirable,  however,  to  summarize  in  general  terms  the 
more  important  features  of  the  Montana  mine  tax  law  and  to 
point  out  what  may  be  considered  their  inadequacy  from  a  fiscal 
point  of  view. 

The  primary  difficulty  is  the  constitutional  provision  prescrib- 
ing a  special  method  for  taxing  the  mines  (Section  3  of  Article 
XII  of  the  Montana  Constitution).  This  section  was  the  subject 
of  heated  discussion  in  the  Constitutional  Convention  of  1889, 
and  was1  adopted  in  the  face  of  violent  opposition  on  the  part  of 
some  members  of  the  convention.  As  pointed  out  above,  this 
constitutional  provision  is  a  legal  device  which  spikes  the  wheels 
of  economic  law  in  the  domain  of  mining.  It  fixes  an  arbitrary 
value  on  the  surface  which  is  one  of  the  elements  in  the  valua- 
tion of  a  mine.  But  the  greatest  significance  of  this  provision 
is  that  it  limits  the  powers  of  the  legislative  bodies  of  the  state 
to  tax  the  mines  in  any  way  which  may  be  deemed  necessary. 
No  other  class  of  property  in  Montana  is  protected  by  such  spe- 
cial constitutional  enactments.  The  general  limitations  on  the 
taxing  power  of  the  state,  such  as  the  requirements  of  uniformity 
and  equality  are  considered  sufficient  for  all  property  in  the 
state.  The  mines  alone  are  accorded  special  constitutional  pro- 
tection. 

There  are  only  five  states  in  the  country  in  which  the  method 
of  taxing  mines  is1  prescribed  in  the  constitution.  These  states 
are  Montana,  Nevada,  Utah,  Wyoming,  and  South  Carolina.1 
Such  states  as  Pennsylvania,  California,  Michigan,  Minnesota, 
Arizona,  and  others,  whose  mines  are  among  their  most  important 
resources,  have  no  special  constitutional  limitations  upon  the 
taxation  of  mineral  property.  In  all  these  states,  the  legislature 

1  L.  E.  Young,  Mine  Taxation  in  the  United  States,  P.  78. 

74 


DEFECTS  IN  MONTANA  MINE  TAX  LAWS          75 

or  the  tax  commission  has  the  necessary  authority  to  deal  with 
the  mines.  Such  procedure  has  not  resulted  in  any  harm  to  the 
mining  industry.  The  five  states  which  still  retain  constitutional 
provisions  on  mine  taxation  are  admittedly  among  those  in  which 
the  more  modern  principles  of  taxation  have  found  the  least  ap- 
plication. 

The  second  defect  in  the  Montana  law  is  the  contradictory 
method  of  assessing  mines  which  is  a  result  of  both  constitutional 
and  statutory  provisions.  As*  shown  above,  the  value  of  a  mine 
for  purposes  of  taxation  is  assumed  to  equal  the  price  paid  to 
the  government  for  the  surface  plus  the  independent  value  of 
the  improvements  plus  the  net  proceeds  of  the  year.  On  such 
an  assessment  the  general  property  tax  rate  is  imposed.  This 
procedure  means  that  the  Montana  mines  are  really  taxed  under 
the  system  of  the  general  property  tax,  but  that  a  large  part  of 
their  assessed  value  is1  more  nearly  income  than  property.  This 
is  a  confusion  of  principles  and  methods  which  is  not  even  justi- 
fied by  the  Constitution.  Section  3  of  Article  XII  of  the 
Constitution  provides  merely  that  the  net  proceeds  shall  be  taxed 
' '  as  provided  by  law. "  It  is  within  the  province  of  the  legisla- 
ture to  determine  how  this  should  be  done.  The  legislature 
could,  if  it  s'o  desired,  tax  the  net  proceeds  as  income  or  in  any 
other  manner.  The  method  of  taxing  net  proceeds  as  personal 
property  is  the  cause  of  the  contradiction  pointed  out  above. 

The  method  of  mine  taxation  adopted  in  Montana  results  in 
a  third  difficulty  which  has  been  referred  to  several  times  in 
the  preceding  chapters,  namely,  the  uncertain  and  fluctuating 
character  of  the  assessment  of  the  mining  industry.  The  net 
proceeds  have  often  dropped  over  50  per  cent  in  one  year. 
This1  is  well  illustrated  by  the  assessment  of  this  year  (1918) 
wrhich  shows  a  return  of  only  $17,355,196  in  net  proceeds  as 
against  $45,519,461  in  1917.  The  decrease  for  the  year  is  about 
62  per  cent.  This  means  a  proportionate  decrease  in 
taxes.  The  situation  especially  affects  the  state  government 
whose  tax  levy  is1  limited  by  the  Constitution  to  two  and  a  half 
mills.  Such  a  decrease  means  a  considerable  loss  in  revenue  and 
consequent  financial  difficulties.  In  view  of  the  continued  growth 
of  our  state  government  which  is  natural  in  a  comparatively  new 
state  such  as  Montana,  the  uncertainty  and  irregularity  result- 


76  MINE  TAXATION  IN  MONTANA 

ing  from  the  method  of  assessing  mines  is  a  particular  disadvan- 
tage. 

This  "net  proceeds"  feature  of  the  law  also  has  the  effect  of 
adjusting  the  taxes  paid  by  the  mines  to  their  earnings.  When 
the  mines  are  prosperous  and  show  larger  net  proceeds,  they  pay 
higher  taxes.  When  business  is  less  thriving,  net  proceeds  and 
the  taxes  paid  by  the  mines  decrease  accordingly.  On  the  other 
hand,  all  other  property  in  the  state  has  to  pay  taxes  on  its  value 
regardless  of  its  earnings  for  the  year.  A  farmer  may  have  a 
crop  failure  or  a  business  may  show  a  deficit  for  the  year,  yet 
the  assessment  of  the  farmer 's  or  business  man 's  property  would 
show  little,  if  any,  effect  of  such  conditions.  Under  the  general 
property  tax,  the  farmer  or  business  man  is  assessed  not  on  what 
he  earns  but  on  what  he  has. 

A  fourth  defect  in  the  law  is  the  peculiar  method  of  computing 
net  proceeds  prescribed  by  the  law.  As  was1  pointed  out  in  Chap- 
ter V,  this  method  is  of  such  a  nature  as  to  make  comparisons 
between  assessments  and  the  financial  reports  for  business*  pur- 
poses entirely  impossible.  This  is  a  serious  matter.  A  scientific 
method  of  accounting  is  an  essential  prerequisite  for  the  proper 
discharge  of  the  obligations  of  business  to  the  state.  The  Inter- 
state Commerce  Commission  has  for  years  prescribed  the  system 
of  accounting  to  be  used  by  the  railroads.  The  public  service 
commissions  in  many  states  prepare  the  forms  of  books  which 
must  be  kept  by  the  public  utilities.  The  adoption  of  the  cor- 
poration income  tax  and  excess  profits  tax  forced  the  federal 
government  to  suggest  methods  of  accounting  to  be  used  for  the 
preparation  of  income  returns'.  The  idea  of  greater  uniformity 
and  of  greater  supervision  of  accounting  methods  by  the  gov- 
ernment is  an  inevitable  development  of  all  recent  tendencies  in 
government  regulation  and  public  finance.  It  would  seem  to 
offer  the  best  solution  for  the  many  difficulties  that  have  caused 
friction  between  tax  officials  and  mining  companies  in  many 
states.  Associations  of  mine  operators'  in  several  of  the  important 
coal  mining  states  have  realized  this  and  have  recommended  such 
uniform  accounting  methods.  The  idea  has  also  been  urged  by 
the  Federal  Trade  Commission.1 

!L.  E.  Young,  Mine  Taxation  in  the  United  States,  p.  207. 


DEFECTS  IN  MONTANA  MINE  TAX  LAW          11 

A  corollary  of  the  above  is  the  fifth  defect  in  the  Montana  law 
which  leaves  the  assessment  of  mines  entirely  to  the  local  assessor. 
No  matter  how  conscientious  and  capable  a  county  assessor  may 
be,  he  cannot  be  expected  to  perform  this  part  of  his  duty  ade- 
quately. The  magnitude  and  complexity  of  the  mining  business 
in  the  state  make  it  necessary  to  devote  much  time  and  to  apply 
special  training  and  experience  to  the  process  of  assessment.  As 
a  rule,  the  county  assessors  in  the  state  are  content  to  receive  the 
statements  of  valuation  sent  in  by  the  officials  of  the  mining 
companies.  This  practically  leaves  the  assessment  of  mines  in 
the  hands  of  the  owners  of  the  mines  and  reduces  the  super- 
vision of  the  taxing  authorities  of  the  state  over  mine  assess- 
ment to  almost  nothing. 

These  are  the  principal  defects  in  the  mine  tax  law  of  Montana. 
The  manner  in  which  these  defects  influence  the  general  tax 
situation  in  the  state  was  s'hown  concretely  in  Chapters  IV  and 
VI.  The  larger  problem  of  what  method  of  mine  taxation  is 
most  adequate  in  general  and  would  fit  conditions  in  Montana 
most  fully  will  be  considered  in  subsequent  chapters. 

The  provisions  of  the  Montana  law,  briefly  summarized  in  this 
chapter  as  inadequate,  have  been  justified  time  and  again  by 
the  peculiar  nature  of  mining,  which  is  a  highly  speculative  busi- 
ness. The  argument  is1  based  on  two  main  propositions :  the  ex- 
haustibility  of  mineral  resources  and  the  assumption  of  excep- 
tional risk  in  mining.  These  propositions  must  be  carefully  an- 
alyzed in  order  to  elucidate  the  general  principles  which  are  at 
the  basis  of  mine  taxation  and  which  should  furnish  the  neces- 
sary guidance  in  changing  the  Montana  law.  They  are  consid- 
ered in  the  chapters  which  follow. 


CHAPTER  VIII. 

THE  EXHAUSTIBILITY  OF  MINERAL  RESOURCES. 

It  is,  of  course,  a  commonplace  that  at  some  time  or  other  all 
mines  become  either  physically  exhausted  or  economically  un- 
profitable under  prevailing  methods  of  metallurgical  treatment. 
The  latter  condition  is  relative  and  is  counteracted  by  the  prog- 
ress1 of  mining  and  metallurgy.  One  of  the  most  remarkable 
developments  in  the  mining  industry  of  Montana  in  the  past  ten 
years  has  been  the  introduction  of  new  and  improved  methods 
which  have  made  possible  the  recovery  of  a  larger  percentage 
of  metal  from  the  ore  and  the  treatment  of  ore  which  was  con- 
sidered unprofitable  before,  thus  extending  the  life  of  the  mines. 
This  race  between  science  and  nature  is  a  feature,  not  only  of 
mining,  but  of  many  other  human  activities  in  which  similar 
factors  are  involved.  However,  in  so  far  as  particular  mines 
are  concerned,  the  race  cannot  be  kept  up  indefinitely,  and 
sooner  or  later  the  stage  of  physical  exhaustion  or  the  limit  of 
economic  exploitation  must  be  reached.  This  is  unavoidable 
because  the  mineral  taken  from  a  mine  cannot  be  replaced  and 
the  very  process  of  making  a  mine  productive  and  profitable 
implies  the  destruction  of  the  basis  upon  which  its  usefulness 
rests. 

The  representatives  of  the  mining  interests  place  especial 
emphasis  upon  this  characteristic  of  the  mining  industry.  In 
their  opinion,  it  differentiates  mining  from  every  other  form  of 
property  and  business1  enterprise.  Mr.  C.  F.  Kelly  in  the  pamph- 
let referred  to  above  contrasts  the  "practically  perpetual  yield 
from  the  farm"  with  "the  yield  from  the  mine  which  is  one 
of  rapid  exhaustion/'  He  finds  the  same  difference  between 
the  railway  and  other  industries  and  mining.  To  quote  Mr.  Kelly : 

"The  railways  that  traverse  the  state  we  believe  will  last 
for  all  time.  They  will  serve  as  medium  of  transportation 
for  people  and  the  commerce  of  this  region  as  long  as  time 
endures.  The  successful  manufacturer  establishes  his  busi- 

78 


79      EZHAUSTIBILITY  OF  MINERAL  RESOURCES 

ness,  and  it  runs  on  without  diminution,  perseverance  in- 
creases the  return,  and  energy  adds  to  and  amplifies  the 
extent  of  business  done.  But  the  greater  the  perserverance, 
the  greater  the  energy,  the  more  skillful  the  operation  of  a 
mine,  the  sooner  it  is  completely  exhausted,  and  all  that 
remains  is  a  cavern  in  a  hillside " 

This  condition  is  beyond  human  control.  ' ' That 

which  has  resulted  from  the  mysterious  forces  of  Nature  working 
through  countless  ages  of  world  making,  when  the  universe  was 
young  and  long  ere  man's  intellect  had  stimulated  activity  on 

the  globe,  cannot  now  be  reproduced "  Mr.  Kelly 

continues :  "Be  the  total  amount  large  or  small  there  is  only  so 
much  commercial  ore  existing  in  any  deposit  or  in  any  locality. 

it  is  impossible  to  either  replenish  or  replace  the 

ore  when  once  taken  from  the  ground."  Mr.  Kelly  illustrates 
his  argument  by  comparing  a  mine  to  "a  piece  of  cheese,  from 
which  a  slice  is  taken  in  each  day's  operation."1 

For  the  sake  of  greater  clearness,  Mr.  Kelly's  argumentation 
may  be  reduced  to  three  simple  propositions.  First,  mines  differ 
from  land  and  other  resources:  mines  are  exhaustible  and  have 
a  brief  life ;  other  resources  are  inexhaustible  and  have  perpetual 
existence.  Secondly,  because  of  this  difference,  the  economics  of 
mining  is  totally  different  from  that  of  all  other  industries. 
Thirdly,  this  difference  is  so  fundamental  as  to  necessitate  an 
absolutely  distinct  method  for  the  taxation  of  mines.  These 
three  propositions  demand  careful  examination. 

it  is  undoubtedly  true  that  there  are  natural  resources  which 
for  all  practical  purposes  are  indestructible.  But  agricultural 
land  cannot  be  classed  among  such  resources  without  some  qual- 
ifications. The  properties  of  the  soil  which  produce  growth  and 
make  farming  possible  are  among  the  things  which  can  be  and 
are  continuously  destroyed.  Every  crop  raised  on  a  farm  con- 
sumes a  certain  amount  of  the  phosphorus,  potassium,  calcium, 
and  other  elements  in  the  soil  which  are  the  foundation  of  fer- 

1  C.  F.  Kelly,  Mining  Taxation  in  Montana,  P.  15. 


80  MINE  TAXATION  IN  MONTANA 

tility.  The  total  destruction  of  the  fertility  of  a  given  portion 
of  the  earth  is  not  entirely  impossible.  .  Recent  historical  re- 
search has  tended  to  place  emphasis  on  soil  exhaustion  as  a  cause 
of  the  downfall  of  great  nations.  The  exhaustion  of  Roman  soil 
has  been  suggested  as  one  of  the  important  factors  which  con- 
tributed to  the  downfall  of  the  Roman  Empire.1  The  evidence 
is  not  confined  to  any  one  country. 

"Go  to  the  ruins  of  ancient  and  rich  civilizations  in  Asia 
Minor,  Northern  Africa  or  elsewhere.  Look  at  the  un- 
peopled valleys,  at  the  dead  and  buried  cities,  and  you  can 
decipher  there  the  promise  and  the  prophecy  that  the  law 
of  soil  exhaustion  held  in  store  for  all  of  us.  It  is  but  the 
story  of  an  abandoned  farm  on  a  gigantic  scale.  Depleted 
of  humus  by  constant  cropping,  land  could  no  longer  re- 
ward labor  and  support  life;  so  the  people  abandoned  it. 
Deserted,  it  became  a  desert;  the  light  soil  was  washed  by 
the  rain  and  blown  around  by  shifting  winds."  - 

One  does  not  have  to  go  to  Africa  or  Asia  to  convince  himself 
of  this  fact.  There  is  sufficient  evidence  of  the  operation  of  this 
law  in  the  United  States.  Long  before  the  Civil  War,  the  system 
of  agriculture  in  the  South  was'  depleting  the  cotton  lands  of  their 
fertility  and  was  causing  the  abandonment  of  estates  in  South 
Carolina  and  Georgia.3  The  deserted  farms  of  New  Hampshire, 
Vermont,  northern  New  York,  and  the  deteriorated  value- 
shrunken  farm  properties  in  western  Massachusetts,  Ohio,  and 
Indiana  tell  the  same  story.  It  is  asserted  that  the  soil  of  the 
West  is  also  being  reduced  in  agricultural  potency  by  exactly  the 
same  processes.4  The  decrease  in  yield  per  acre  has  affected  even 
such  new  regions  as  the  wheat  district  of  Minnesota  and  North 
Dakota.5  Wrong  methods  of  agriculture  are  the  chief  cause  of 
the  destruction  of  the  productive  power  of  the  earth.  But  the 
process  of  erosion  is  also  responsible  for  the  loss  of  large  tracts 
of  fertile  land  which  are  swept  away  into  streams  and  to  the  sea. 

!V.  G.  Simkhovitch,  Rome's  Fall  Reconsidered,"  Political  Science 
Quarterly,  June,  1916. 

2  Simkhovitch,  "Hay  and  History,"  Political  Science  Quarterly,  Septem- 
ber, 1913. 

3  Thomas  N.  Carver,  Selected  Readings  in  Rural  Economics,  p.  277. 

4  Edwin  G.  Nourse,  Agricultural  Economics  (1916),  p.  192. 

5  J.  R.  Smith,  Commerce  and  Industry  (1916),  p.  29. 


EXHAUSTIBILITY  OF  MINERAL  RESOURCES      81 

It  is  estimated  that  at  least  4,000,000  acres  of  farm  land  in  the 
United  States  have  been  totally  ruined  by  erosion,  and  that  about 
twice  as  many  acres'  have  been  seriously  damaged.  The  loss  of 
fertility  due  to  erosion  amounts  to  millions  of  dollars  annually, 
though  the  process  is  so  slow  and  uniform  that  it  may  not  be 
perceptible  for  some  time.1 

Agricultural  land  is  thus  not  an  indestructible  resource.  Never- 
theless there  is  a  difference  between  farming  land  and  mineral 
deposits  which  must  not  be  ignored.  Though  land  and  minerals 
are  both  exhaustible  in  use,  agricultural  land  may  be  restored  to 
its  productivity  by  proper  fertilization  and  scientific  methods 
of  agriculture,  while  mineral  deposits  are  totally  exhausted  and 
destroyed  in  the  process  of  use.  This1  means  that  agricultural 
land  and  similar  resources  may  be  maintained  in  a  state  of 
production  indefinitely.  In  the  old,  settled  countries  of  the 
world,  agriculture  has  been  carried  on  on  the  same  land  for  many 
centuries.  The  soil  of  such  countries  has  been  worked  over  many 
times',  and  is  as  much  the  work  of  man  as  the  gift  of  nature. 
The  important  fact,  however,  is  that  land  can  be  so  maintained 
and  even  improved  and  offers  a  basis  for  indefinite  use.  A 
mine,  on  the  other  hand,  can  be  used  for  purposes  of  production 
only  as  long  as  the  ore  lasts,  which  is  necessarily  a  more  or  less' 
limited  period  of  time. 

The  same  distinction  may  be  made  between  mineral  and  other 
resources,  such  as  timber  lands,  or  such  productive  enterprises 
as  railroads.  It  must  be  remembered,  however,  that  -the  dis- 
tinction is  not  absolute.  There  are  conditions  under  which  the 
restoration  of  agricultural  land  may  be  entirely  unprofitable. 
The  large  number  of  abandoned  farms  in  the  country  illustrates 
this  very  clearly.  Urban  land  may  lose  all  or  part  of  its  value 
as  a  result  of  changes  in  population  or  other  conditions  of  urban 
life.  A  manufacturing  plant  may  be  affected  in  the  same  way 
by  changes  in  fashion  and  social  tastes  or  by  general  industrial 
transformations'.  In  an  economic  sense,  such  changes  which  re- 
sult in  the  total  or  partial  destruction  of  the  value  of  property  are 
analogous  to  exhaustion.  On  the  whole,  however,  the  contrast 
between  a  mine  and  other  forms  of  wealth,  as'  outlined  above, 
may  be  accepted  as  correct. 

1  Yearbook  of  the  Department  of  Agriculture,  1916,  PP-  107-118. 


82  MINE  TAXATION  IN  MONTANA 

The  important  question,  however,  is,  what  is  the  meaning  of 
this  difference  between  mineral  and  other  resources.  Has'  it  the 
economic  significance  ascribed  to  it  by  mining  men  and  others? 
The  answer  to  this  question  depends  upon  a  proper  analysis  of 
the  generally  recognized  principles  of  business  enterprise. 

The  fundamental  consideration  in  all  business  is  to  preserve 
the  capital  invested  in  addition  to  obtaining  an  adequate  return 
on  it.  The  individual  investor  buys  bonds  or  stocks  in  the  ex- 
pectation, not  only  that  he  will  receive  a  certain  annual  income, 
but  that  he  will  recover  at  least  the  amount  invested  when  his 
security  matures  or  when  he  decides  to  sell  it.  Every  business 
enterprise  as1  a  going  concern  is  considered  successful  only  if  it 
earns  a  proper  return  while  maintaining  its  capital  unimpaired. 
In  every  business  the  capital  is  invested  in  concrete  capital 
goods :  land,  machinery,  tools,  buildings,  etc.  The  preservation  of 
the  capital  implies  the  maintenance  of  these  capital  goods  in 
proper  condition.  It  also  involves  renewals  and  replacements1 
made  necessary  by  the  changing  standards  of  the  business  and 
by  the  progress  of  industry  in  general. 

The  demand  for  maintaining  capital  intact  is  counteracted  by 
the  fact  that  all  things  are  subject  to  deterioration  and  dis- 
integration. Buildings;  machinery,  dams,  ditches,  tools,  etc., 
all  wear  out  sooner  or  later.  Besides  the  wear  and  tear,  the 
changes  in  economic  life,  such  as  new  inventions,  new  processes, 
new  fashions,  result  in  the  obsolescence  of  machines  and  plants 
for  productive  purposes.  In  a  word,  the  law  of  nature  is  de- 
struction ;  the  law  of  business  is  the  preservation  and  accumula- 
tion of  capital.  This  is  one  of  the  many  instances  of  the  diver- 
gence between  the  processes  of  nature  and  the  demands  of  social 
existence.  If  man  is  to  achieve  his1  business  ends  he  must  protect 
himself  against  the  destruction  wrought  by  nature  and  also 
against  the  destructive  results  of  his  own  inventive  genius. 

The  problem  has  been  s'olved  by  regarding  the  maintenance  of 
capital  goods  as  part  of  the  expenses  of  production  and  by 
making  special  allowance  from  current  earnings  for  the  depre- 
ciation of  property  which  cannot  be  made  good  by  current  re- 
pairs. This  is  the  procedure  of  modern  accounting.  Every  well 
conducted  business  not  only  includes  repairs,  renewals,  and  some 
of  its1  betterments  in  operating  cost,  but  also,  provides  special 


EXHAUSTIBILITY  OF  MINERAL  RESOURCES      83 

funds  to  offset  the  decreased  serviceability  and  value  of  its 
tangible  and  intangible  assets.  The  financial  reports  of  the 
various  corporations  in  Chapter  V  illustrate  this  very  well. 
Maintenance  and  depreciation  are  among  the  charges  against 
gross  proceeds'  by  which  net  income  is  reduced,  while  the  re- 
placement fund  appears  as  a  special  account  on  the  balance 
sheet  of  the  firm  or  company.  Whether  depreciation  and  reserve 
funds  are  merely  nominal  accounts  and  represent  investments  in 
the  business,  or  are  actually  accumulated  in  the  form  of  cash,  se- 
curities', independent  property,  etc.,  they  serve  the  same  purpose, 
namely,  to  assure  the  continued  and  unimpaired  existence  of  the 
capital  invested. 

The  provision  of  depreciation  and  similar  funds  is  based  on 
the  recognition  that  capital  must  be  constantly  renewed  from 
current  earnings.  Production  is  the  only  source  from  which  all 
business  enterprises  can  and  must  draw  the  strength  for  con- 
tinued existence.  Every  business  is  expected  to  conduct  its  op- 
erations so  as  to  reproduce  periodically  the  capital  it  represents 
in  addition  to  the  desirable  returns  in  the  form  of  interest  and 
profits'.  Whether  the  business  lasts  a  year  or  a  century,  the 
process  involved  remains  the  same. 

The  manner  in  which  these  general  principles  affect  partic- 
ular kinds  of  business  can  be  easily  traced.  A  railroad,  for  in- 
stance, can  no  more  last  forever,  without  being  constantly  re- 
newed, than  a  human  being  can  live  without  food.  The  elements 
which  compose  the  railroad,  its  road-bed,  rails',  ties,  cars,  engines 
are  continuously  giving  out  under  the  pressure  of  the  forces  of 
nature.  The  life  of  the  various  parts  of  the  road  differs  in 
length,  but  there  is  a  definite  period  beyond  which  they  all  wear 
out.  If  a  railroad  should  carry  on  its  business  without  con- 
stantly repairing,  renewing,  and  improving  its  road-bed  and 
rolling  stock,  it  would  find  itself  incapacitated  in  a  very  short 
time.  The  heavy  expenditures  for  maintenance  of  way  and 
equipment,  which  may  be  found  in  the  income  account  of  every 
railroad,  are  sufficient  evidence  of  this  fact.  Though  the  out- 
lays for  repairs  and  renewals  are  made  continuously,  it  may  be 
said  that  the  accumulation  of  these  outlays  for  a  number  of 
years  represents  a  total  renewal  of  the  road  or  in  other  words, 
a  replacement  of  the  original  capital  invested  in  the  road. 


84  MINE  TAXATION  IN  MONTANA 

The  same  is1  true,  not  only  of  manufacturing  and  mercantile 
establishments,  but  also  of  farming.  The  annual  depreciation  of 
farm  machinery,  farm  buildings,  livestock,  etc.,  is  considerable. 
Investigations  in  a  number  of  states  have  shown  that  the  rate 
of  depreciation  on  farm  machinery  varies  from  5  to  20  per  cent, 
depending  on  the  implement  and  the  way  it  is  us'ed;  that  the 
loss  from  decrease  in  the  value  of  sheep  sold  as  well  as  from 
deaths  results  in  a  depreciation  of  nearly  10  per  cent ;  and  that 
the  average  depreciation  on  a  large  number  of  horses  is  over  8 
per  cent;  while  on  pure  bred  and  highly  graded  cattle  it  varies 
from  4  to  13  per  cent.1  Whether  the  farmer  keeps  proper  ac- 
counts1 or  not,  he  is  constantly  replacing  the  value  of  his  improve- 
ments, buildings,  machinery  and  livestock  out  of  the  earnings 
of  his  farm. 

But  a  successful  farmer  must  do  more  than  that.  "A  farm 
cannot  properly  be  called  successful  unless  it  pays  a  fair  rate  of 
interest  on  the  investment,  returns  fair  wages  for  the  farmer's 
labor,  and  maintains  at  the  same  time  the  fertility  of  the  soil."  2 
This1  is  essential  because  the  fertility  of  the  soil  is  the  funda- 
mental element  in  the  value  of  a  farm  and  it  is  subject  to  deteri- 
oration and  destruction.  The  fertility  is  maintained  by  proper 
manuring,  rotation  of  crops,  commercial  fertilizers1  and  other 
improvements  which  involve  considerable  expenditures.  These 
are  properly  charged  to  the  cost  of  operating  the  farm.  The 
efficient  farmer  must  follow  the  procedure  of  all  good  business 
men.  He  must  include  repairs  arid  the  maintenance  of  soil 
fertility  in  his  operating  expenses  and  must  provide  for  the 
eventual  replacement  of  his  buildings,  machinery,  and  other  im- 
provements. In  other  words,  that  part  of  his  capital  which  is 
represented  by  his  improvements  and  by  the  exhaustible  prop- 
erties of  the  soil  is  constantly  reborn  in  the  process  of  produc- 
tion. 

These  general  principles  of  business  enterprise  are  also  applic- 
able to  mining.  A  successful  producing  mine  is  expected  to 
return  at  the  end  of  its  life-period  the  capital  invested  in  it  and 
a  fair  interest  on  such  capital.  Both  the  capital  and  the  return 

1  Nourse,  Agricultural  Economics,  pp.  300-04. 

2  Farmer's  Bulletin  No.  661,  published  by  the  Department  of  Agricul- 
ture.   Italics  mine. 


EXHAUSTIB1LITY  OF  MINERAL  RESOURCES      85 

on  it  must  come  from  the  earnings  of  the  mine.  The  main- 
tenance of  the  improvements  in  and  about  a  mine  is  a  part  of  the 
operating  expenses  which  also  include  the  cost  of  development 
work.  New  construction  which  is  a  replacement  of  deteriorated 
and  obsolete  improvements  as  well  as  all  losses1  in  the  value  of 
the  plant  which  cannot  be  repaired  are  taken  care  of  by  means 
of  depreciation  funds,  as  is  done  in  other  industrial  enterprises. 
The  only  difference  which  arises  in  the  case  of  mines1  is  the  de- 
preciation of  property  which  is  caused  by  the  depletion  of  the 
ore.  Such  depreciation  cannot  be  guarded  against  by  renewals, 
betterments,  or  extensions  in  the  particular  mine  which  is  being 
consumed.  But  it  can  be  taken  care  of  in  other  ways.  A  mining 
company  whose  mines  are  being  exhausted  may  devote  part  of 
its1  annual  earnings  to  acquire  new  mining  properties  which  will 
prolong  the  life  of  the  enterprise.  Such  has  been  the  policy  of 
English  companies  for  many  years,  and  it  is  being  adopted  in  the 
United  States.1  Another  way  to  redeem  the  capital  invested  in 
a  mine  is  to  set  aside  from  earnings  annually  a  sum  which  at  a 
given  rate  of  interest  will  at  the  end  of  the  life-period  of  the 
mine  return  the  original  capital.2  This  involves  the  difficulty 
of  determining  the  life  of  a  mine  which  will  be  dis'cussed  in 
another  chapter.  Such  provision  for  the  redemption  of  capital 
invested  in  mines  is  known  as  amortization.  It  is  the  same 
principle  which  is  involved  in  sinking  funds  used  by  corporations 
in  general  for  the  extinction  of  interest  bearing  debts.  The 
financial  statements  of  the  mining  companies  referred  to  in 
Chapter  V  show  that  these  large  and  well  organized  com- 
panies not  only  make  definite  annual  charges  for  the  deprecia- 
tion of  equipment,  but  also  carry  special  allowances  for  ' '  ore  ex- 
tinguishment "  or  "  capital  distribution. ' '  They  thus  clearly  and 
definitely  provide  for  the  return  of  the  capital  invested  in  their 
business. 

The  confusion  of  ideas  concerning  the  real  significance  of 
wasting  assets,  such  as  mines,  has  been  the  result  chiefly  of  the 
practice  followed  by  so  many  mining  companies  of  distributing 
all  their  earnings  in  dividends  without  making  proper  provisions 

1  Robert  S.  Lewis,  "Amortization  and  Depreciation,"  The  Mining  and 
Scientific  Press,  September  23,  1916. 

2  E.  B.  Skinner,  The  Mathematical  Theory  of  Investment,  p.  161. 


86  MINE  TAXATION  IN  MONTANA 

for  depreciation  and  amortization.  Such  companies'  have  left  it 
to  their  stockholders  to  make  the  necessary  division  of  dividends 
into  profits  and  capital  returned.1  This  procedure  has  been 
justified  on  various  theoretical  grounds.2  But  in  practice  the 
majority  of  investors  in  mining  stocks  have  revealed  but  a  very 
vague  idea  of  the  true  nature  of  the  earnings'  derived  from  their 
holdings  and  have  not  provided  for  the  amortization  of  their  in- 
vestment, thus  suffering  frequently  a  total  or  partial  loss  of  cap- 
ital. 

The  necessity  of  allowing  for  depreciation  and  amortization 
and  of  distinguishing  clearly  dividends  which  are  profit  from 
dividends  which  are  capital  returned,  has  recently  been  impressed 
upon  the  mining  business1  by  the  new  developments  in  federal 
taxation.  The  Federal  Income  Tax  Law,  that  is,  the  Act  of 
September  8,  1916,  as  amended  October  3,  1917,  forced  the 
mining  men  of  the  country,  as  well  as  other  business  men,  to  re- 
consider carefully  their  systems  of  accounting  in  order  to  adjust 
themselves  to  the  requirements  of  the  government.  The  federal 
law,  which  places'  a  tax  on  net  income,  allows  certain  deductions 
which  in  the  case  of  mines  are  as  f  ollowrs : 

"All  losses  actually  sustained  and  charged  off  within  the 
year  and  not  compensated  by  insurance  or  otherwise,  includ- 
ing a  reasonable  allowance  for  the  exhaustion,  wear  and 
tear  of  property  arising  out  of  its  use  or  employment  in 

the  business  or  trade In  the  case  of  mines  a 

reasonable  allowance  for  depletion  thereof  not  to  exceed  the 
market  value  in  the  mine  of  the  product  thereof  which 
has  been  mined  and  sold  during  the  year  for  which  the 
return  and  computation  are  made,  such  reasonable  allow- 
ance to  be  made  ....  under  rules  and  regulations  to 
be  prescribed  by  the  Secretary  of  the  Treasury.  Provided, 
that  when  the  allowance  authorized  shall  equal  the  capital 
originally  invested,  or  in  case  of  purchase  made  prior  to 
<J  March  first,  1913,  the  fair  market  value  as  of  that  date, 
no  further  allowance  shall  be  made." 

These  provisions  of  the  Federal  Income  Tax  Law  have  been 
supplemented  by  the  regulations  of  the  United  States  Internal 

1  T.  O.  McGrath,  "The  Standardization  of  Directors'  Reports  for  Min- 
ing Companies,"  Engineering  and  Mining  Journal,  May  4,  1918. 

2  G.  A.  Denny,  The  Deep  Level  Mines  of  the  Rand,,  p.  99.    See  also  H. 
C.  Hoover,  Principles  of  Mining,  p.  44. 


EXHAUSTIBILITY  OF  MINERAL  RESOURCES      87 

Revenue  Department,  according  to  which  mining  companies  must 
show  portions  of  dividends  paid  from  profits  and  from,  capital 
returned  and  must  carry  on  their  balance  s'heet  the  actual 
reserves'  set  aside  from  earnings  for  capital  returned.  Under 
these  regulations  a  mining  business  must  keep 

"an  accurate  ledger  account  in  which  shall  be  charged  the 
fair  market  value  as  of  March  1,  1913,  or  the  cost,  if  the 
property  was  acquired  subsequent  to  that  date,  of  the  min- 
eral deposits  involved.  This  account  shall  be  credited  with 
the  amount  of  the  depletion  deduction  claimed  and  allowed 
each  year,  or  the  amount  of  the  depletion  shall  be  credited 
to  a  depletion  reserve  account,  to  the  end  that  when  the 
sum  of  the  credits  for  depletion  equals  the  value  or  cost  of 
the  property,  no  further  deduction  for  depletion  with  respect 
to  this  property  shall  be  allowed.  The  value  determined 
and  set  up  as  of  March  1,  1913,  or  the  cost  of  the  property 
if  acquired  subsequent  to  that  date,  will  be  the  basis  for 
determining  the  depletion  deduction  for  all  subsequent 
years  during  the  ownership  under  which  the  value  was 
fixed,  and  during  such  ownership  there  can  be  no  revalua- 
tion for  the  purpose  of  this  deduction  if  it  should  be  found 
that  the  estimated  quantity  of  the  mineral  deposit  was 
understated  at  the  time  the  value  was  fixed  or  at  the  time 
the  property  was  acquired." 

The  provisions  and  regulations  of  the  United  States  Treasury 
Department,  as  well  as  the  general  analysis  presented  above, 
clearly  show,  that  if  provision  is  made  for  amortization,  the 
distinction  between  such  wasting  assets  as  mines  and  other  in- 
dustrial enterprises'  is  considerably  weakened.  The  difference 
consists  mainly  in  the  fact  that  in  industrial  and  mercantile 
enterprises  the  original  investment  can  be  maintained  unimpaired 
indefinitely  in  the  same  business  by  means  of  replacements  and 
betterments,  while  in  mining  the  original  investment  can  be 
maintained  only  by  being  placed  or  invested  in  property  outside 
the  particular  mine  which  is  being  exhausted.  From  the  point 
of  view  of  the  investor,  this  means  that  a  mine  can  offer  an 
opportunity  for  investment  for  a  limited  period  of  time  only. 
Suppose  the  body  of  ore  in  a  mine  lasts  five  or  fifteen  years.  If 
the  mine  is  a  success,  the  investor  finds  at  the  end  of  the  five  or 
fifteen  years,  that  he  has1  received  his  original  investment  in 
addition  to  fair  dividends  for  the  period.  Assuming  that  his 


88  MINE  TAXATION  IN  MONTANA 

mining  company  followed  the  practice  of  safeguarding  the  cap- 
ital by  means  of  a  sinking  or  amortization  fund,  the  investor  at 
the  end  of  the  five  or  fifteen  years  receives  back  his  investment 
in  toto,  but  his  mine  is  exhausted  and  he  is  faced  with  the  prob- 
lem of  finding  new  employment  for  his1  capital.  If  his  mining 
company,  on  the  other  hand,  distributed  the  capital  invested  in 
annual  installments  in  the  form  of  earnings  or  of  capital  dis- 
tributions, the  investor  had  to  consider  the  problem  of  reinvest- 
ing his  capital  from  year  to  year.  In  this  respect,  he  was  cer- 
tainly at  a  disadvantage  as  compared  with  investors  in  other 
forms  of  property.  An  investor  in  railroad  securities  or  in  a 
manufacturing  business  or  in  a  farm  may  keep  his  investment 
unchanged  indefinitely;  not  because  railroads  or  farms  are  in- 
destructible or  inexhaustible,  but  because  they  are  capable  of 
maintenance  and  restoration.  At  the  end  of  a  five  or  fifteen 
year  period,  both  the  investor  in  a  railroad  and  the  investor  in 
a  successful  mine  find  themselves  in  the  same  position  in  so  far  as 
their  capital  is  concerned.  But  the  investor  in  railroad  securities 
or  owner  of  a  farm  need  not  think  about  changing  his  invest- 
ment ;  it  may  be  maintained  in  the  same  form  for  many  years  to 
come.  The  investor  in  or  owner  of  a  mine  in  the  process  of  ex- 
haustion must  think  of  placing  his  capital  in  some  new  field  of 
investment  continuously  or  at  frequent  intervals.  This  is  an 
advantage  which  the  farmer,  manufacturer,  or  the  trader  has 
over  the  investor  in  mines.  But  this  disadvantage,  which  is  the 
result  of  the  exhaustibility  of  mineral  deposits,  is  rewarded  in 
a  definite  manner  in  accordance  with  the  laws  of  the  market.  It 
is  a  general  fact  that  all  securities  which  have  a  short  life  and 
which,  therefore,  impose  upon  their  holders  the  necessity  of  fre- 
quent changes  and  of  greater  care,  all  other  conditions  being 
equal,  pay  a  higher  rate  of  return.  Partly  because  of  the  possi- 
bility of  exhaustion,  the  investor  in  mines  expects  larger  profits, 
and  it  is  generally  agreed  that  he  is1  justified  in  entertaining  such 
expectations.1 

This  has  long  been  recognized  by  mining  engineers  and  opera- 
tors.    In  an  article  written  for  the  Engineering  and  Mining 

1  The  effects  of  the  uncertainty  of  the  period  for  which  a  mine  may 
last  as  well  as  the  appreciation  in  value  of  such  resources  as  land  are 
considered  in  another  place. 


EXHAUSTIBILITY  OF  MINERAL  RESOURCES      89 

Journal  on  June  2,  1904,  by  Mr.  F.  Hobart,  under  the  title 
" Amortization,"  the  difference  between  mining  and  other  in- 
vestments is  clearly  stated  in  the  following  words : 

"A  mining  investment,  in  the  great  majority  of 
cases,  is  a  terminable  investment,  not  a  permanent 
one.  That  is,  it  will  end  and  become  unproductive 
after  a  time,  shorter  or  longer,  according  to  the  nature 
of  the  mine.  It  is  not  a  permanent  investment,  like  a  rail- 
road, which  may  be  expected  to  last  and  to  return  profits 
for  an  indefinite  period.  A  mining  investment,  therefore, 
to  be  good,  should  return  not  only  ordinary  interest  on  the 
capital,  but  a  further  sum,  sufficient  to  repay  the  original 
capital  during  the  life  of  the  mine." 

To  meet  this  situation,  the  writer  advocates  a  more  general  use 
of  amortization  funds,  such  as  are  common  in  France,  England 
and  elsewhere.1 

In  the  case  of  the  Anaconda  Copper  Mining  Company,  the 
problems  of  depreciation  and  amortization  have  been  solved  in 
what  may  be  considered  a  satisfactory  manner.  The  Company 
has  always  been  noted  for  making  liberal  allowances  for  depre- 
ciation. In  1916  it  charged  off  $7,113,463  for  depreciation  and 
obsolescence  of  mining  plants,  smelters,  refineries,  etc.,  and  in 
1917,  $5,387,436  was  charged  off  for  the  same  purpose.  On  De- 
cember 31,  1917,  its  depreciation  reserve  was  reported  as  $10,- 
316,446.  The  reports  of  the  Company  do  not  reveal  whether 
allowances  are  made  for  the  depletion  of  ore.  But  it  is  known 
that  the  Company  "has  been  buying  mines  right  along,"  and  it 
is  surmised  that  it  has  reckoned  that  * '  developments  and  acquisi- 
tions have  maintained  their  resources."2  The  policy  of  the 
Company  has  been  to  use  part  of  its  earnings  for  the  acquisition 
of  new  properties.  It  owns  over  250,000  shares  of  Inspiration 
(nearly  21  per  cent),  about  60,000  shares  of  Greene-Cananea, 
382,912  shares  of  Alice  Gold  and  Silver  Mining  Company,  over 
200,000  shares  (42  per  cent)  of  Butte  Copper  and  Zinc  Com- 
pany. It  is  estimated  that  the  Andes  mines  in  South  America 

1  Quoted   in   Economics   of  Mining,   by   Rickard,   Hoover   and   others 
(1907),  p.  194. 

2  W.  R.  Ingalls,  "Anaconda's  Finances,"  Engineering  and  Mining  Jour- 
nal, June  16,  1917. 


90  MINE  TAXATION  IN  MONTANA 

are  worth  at  least  $30,000.000  and  were  acquired  by  the  Ana- 
conda Company  at  a  cost  of  about  $4,000,000.1  By  the  acquisi- 
tion of  these  and  other  properties  with  part  of  its  earnings,  the 
Anaconda  Company  has  not  only  filled  the  gaps  in  its  assets 
made  by  the  depletion  of  some  of  its  ore-bodies,  but  has1  con- 
siderably increased  the  value  of  its  holdings.  It  is  generally 
thought  that  the  assets  of  the  Company  have  a  greater  value 
than  that  at  which  they  are  carried  on  the  books.  The  surplus, 
reported  as  of  December  31,  1917,  was  $62,913,989,  equivalent  to 
over  $25  per  share  on  the  outstanding  capitalization  (2,331,250 
shares  at  $50  par  value).  It  is  estimated  that  by  December  31, 
1918,  the  surplus  will  have  reached  the  sum  of  $87,600,000  or 
$37  per  share  of  common  stock.  This  financial  condition  cer- 
tainly shows  a  remarkable  preservation  and  extension  of  the  in- 
vestment entrusted  to  the  Company. 

This1  is  also  evident  from  the  record  of  the  Company  showing 
earnings  and  disbursements  to  stockholders.  It  is  estimated  that 
from  1880  to  1894,  when  the  Anaconda  was  a  close  corporation, 
the  total  earnings  from  the  mine  were  not  less  than  $50,000,000.2 
In  1895  the  Anaconda  Copper  Mining  Company  was  organized 
under  the  laws  of  Montana  with  a  capitalization  of  $50,000,000, 
shares  $25  par.  In  the  fifteen  years'  from  1895  to  1909,  the 
Company  paid  in  dividends  $44,850,000,  which  was  nearly  90 
per  cent  of  its  capitalization.  The  old  Boston  and  Montana, 
organized  in  1887,  with  a  capitalization  of  $3,750,000,  paid  dur- 
ing the  period  from  1887  to  the  close  of  1905,  a  total  of  $44,500,- 
000  in  dividends,  or  twelve  times  its  original  capitalization.3 
In  1910  the  stockholders  of  the  A.  C.  M.  Co.  voted  to  increase 
the  capitalization  of  the  Company  to  $150,000,000  (shares  $25 
par)  in  order  to  acquire  the  Butte  mining  companies  controlled 
by  the  Amalgamated  Copper  Company.  This  increased  capital 
was  used  to  absorb  the  Boston  and  Montana,  the  Washoe  Copper 
Company,  the  Red  Metal  Mining  Company,  etc.  From  1910  thus 
dates  the  Consolidated  Anaconda  Copper  Mining  Company,  which 
as  a  result  of  its  absorption  of  the  principal  mining  properties  of 

1  Ibidem. 

2  Walter  Harvey  Weed,  The  Copper  Handbook  (1912-13),  p.  48. 

3  Charles  P.  Speare,  "The  Story  of  Copper,"  Review  of  Reviews,  No- 
vember, 1916.      See  also  W.  H.  Weed. 


EXHAUSTIBILITY  OF  MINERAL  RESOURCES      91 

the  Butte  district,  became  "the  largest  copper  company  in  the 
world/'1  On  May  29,  1915,  the  par  value  of  Anaconda  stock 
was1  changed  from  $25  to  $50  a  share,  and  the  number  of  shares 
was  reduced  by  half.  At  the  present  time  the  outstanding 
capitalization  is  2,331,250  shares  at  $50  par  or  $116,562,500. 

The  reports  of  Anaconda's  operations  since  the  consolidation  of 
properties  in  1910  show  that  in  the  seven  years  from  1911  to 
1917  the  total  net  earnings  of  the  Company  were  in  round  num- 
bers $148,700,000.  During  the  eight  years'  from  1910  to  1917, 
the  Anaconda  distributed  in  dividends  $95,070,000.2  In  the 
eighteen  year  from  1900  to  1917,  the  A.  C.  M.  Co.  paid  in 
dividends  to  its  stockholders  the  sum  of  $128,870,000.  In  the 
thirteen  years  from  1905  to  1917,  the  net  earnings  of  the  Com- 
pany were  over  $181,000,000,  while  its  dividend  disbursements 
during  the  same  period  amounted  to  $116,520,000.  In  other 
words,  during  the  period  of  1905-1917,  the  A.  C.  M.  Co.  earned 
a  sum  equal  to  150  per  cent  of  its  outstanding  capitalization  and 
paid  in  dividends  a  sum  equal  to  its  capitalization.  Considering 
the  five-year  period  1913-1917  only,  one  finds  that  the  net  earn- 
ings of  the  A.  C.  M.  Co.  were  $124,800,000,  while  its  dividend 
payments  to  stockholders  amounted  to  $68,700,000.  That  is,  in 
the  five  years  ending  December  31,  1917,  the  Anaconda  earned 
$8,000,000  more  than  its  total  outstanding  capitalization  and 
distributed  to  its  stockholders'  dividends  equal  to  59  per  cent  of 
issued  capital  stock. 

In  view  of  this  financial  record,  it  would  seem  that  even  the 
disadvantages  referred  to  above,  which  exist  in  the  case  of  many 
mining  investments,  have  been  largely  eliminated  by  the  Ana- 
conda Copper  Mining  Company.  Through  the  acquisition  of  new 
properties  and  the  extension  of  operations  to  new  fields,  the  Com- 
pany has  successfully  met  the  problem  of  exhaustibility.  While 
one  or  another  of  its  mines  may  show  signs  of  exhaustion,  the 
Company  continues  to  strengthen  its  position  by  the  acquisition  of 
new  deposits  whose  future  is  assured.  No  one  connected  with  the 
direction  of  the  Anaconda  Copper  Mining  Company  has  expressed 
fear  that  the  days  of  the  Company  were  counted.  The  holder  of 

1  W.  H.  Weed,  op.  cit.,  P-  48. 

2  W.  H.  Weed,  The  Mines  Handbook  (1918).  See  also  annual  reports  of 
A.  C.  M.  Co. 


92  MINE  TAXATION  IN  MONTANA 

Anaconda  stock  is  thus  even  spared  the  trouble  of  worrying  about 
the  near  future  or  of  having  to  transfer  his  investment  to  other 
fields. 

How  does  the  above  analysis  affect  the  taxation  of  mines? 
According  to  Mr.  Kelly  and  others,  the  exhaustibility  of  mines 
is  a  fundamental  factor  in  the  situation.  They  maintain  that 

"in  the  case  of  the  farm  or  the  business  block,  no  matter 
how  often  the  same  may  be  taxed,  the  body,  the  substance, 

the  elements  of  value  will  remain such  property 

is  never  wholly  consumed  by  taxes In  the  case  of 

a  mine,  however,  the  ore  in  the  ground  is  absolutely  value- 
less, it  is  incapable  of  producing  anything  of  value  .... 

as  it  exists  in  nature Until  each  particular  ton  of 

ore  is  reached  by  expensive  workings  and  excavated,  it  is 

not  a  thing  of  value The  moment  it  is  reached  in 

the  course  of  mine  development,  and  extracted  from  the 
earth,  it  becomes  property,  a  thing  of  value  ....  a  thing 
of  worth,  possessing  the  elements  of  taxable  wealth  and  at 
that  very  moment  under  our  system  of  taxation  it  is  so 
taxed.  ...  If  the  proposals  should  be  carried  out  to  tax 
in  advance  of  ore  extraction,  upon  a  speculative  valuation, 
the  contents  of  a  mine  ....  the  basic  objection  exists 
that  such  a  tax  is  cumulative  in  character." 

This  general  statement  is  illustrated  by  the  following  example: 

"A  ton  of  ore  containing  sixty  pounds  of  copper,  a  hundred 
feet  beneath  the  surface  of  the  ground,  is  until  that  ton  of 
ore  has  been  reached,  as  incapable  of  being  considered  wealth 
as  would  be  the  same  ton  of  ore  if  it  wrere  at  the  bottom  of 

the  sea Therefore,   if  today  that   ton  of  ore  is 

taxed there  has  been  taken  away  from  that  ton 

of  ore  in  advance  of  any  possible  use  to  which  it  may  be 
applied,  three  per  cent  of  its  entire  value.  If  you  do  that 
next  year,  there  has  been  taken  away  six  per  cent  of  its 
value.  And  so  on,  the  process  of  destruction  by  taxation 
will  continue  until  there  will  come  a  stage  in  the  develop- 
ment of  every  mine  where  the  aggregate  of  the  cumulative 
tax  must  of  necessity  be  offset  against  the  value  of  the  ore 
in  the  ground  and  when  the  point  has  been  reached  that 
the  tax  plus  the  necessary  expense  of  extraction,  exceeds 
the  total  value,  mining  must  stop."  * 

1  Mining  Taxation  in  Montana,  PP.  16-17. 


EXHAUSTIBILITY  OF  MINERAL  RESOURCES      93 

This  reasoning  is  further  illustrated  by  the  condition  in  Butte 
where  the  mines  have  been  worked  continuously  for  thirty  years. 

"If  [runs  the  argument]  without  compounding  interest, 
the  principle  advocated  by  those  who  favor  the  abolition 
of  the  net  proceeds  theory  had  been  followed,  today  ninety 
per  cent  of  the  value  of  the  ore  that  is  being  mined,  would 
have  been  paid  in  taxation  and  the  ten  per  cent  of  remain- 
ing value  would  be  entirely  insufficient  to  justify  the  ex- 
traction of  the  ore.  No  parallel  exists  for  this  in  any  other 
species  of  taxable  wealth,  because  no  other  species  of  tax- 
able wealth  is  completely  and  finally  exhausted  by  the  con- 
summation of  the  act  of  giving  it  value."  1 

Such  is  the  argument  in  favor  of  special  taxation  of  mines 
based  upon  the  fact  of  mine  exhaustibility.  The  weakness  in  this 
chain  of  reasoning  may  be  made  clearer  by  considering  separately 
each  step  in  the  argument.  Mineral  ore  has  no  value  until  it  is 
reached  by  expensive  workings  and  excavated.  In  what  respect 
does  this  differ  from  most  commodities?  No  one  has  yet  been 
able  to  eat  bread  before  it  was  baked,  or  wear  a  suit  before  it 
was1  tailored,  or  live  in  a  house  before  it  was  built.  Most  things 
must  pass  through  some  process  of  production  in  order  to  assume 
a  useful  form  and  to  become  of  value.  As  was  pointed  out  above, 
even  land  is  eventually  so  worked  over  by  man  as  to  obliterate  all 
possible  distinction  between  its  original  properties  and  those  im- 
parted to  it  in  the  process  of  cultivation.  It  may  be  claimed  that 
none  the  less  land  is  originally  a  free  gift  of  nature.  But  so  are 
mineral  deposits.  The  situation  is  somewhat  obscured  by  the  fact 
that  land,  as  a  rule,  appreciates  in  value  with  the  lapse  of  time 
and  that  the  increased  value,  in  part  at  least,  is  the  result  of  scar- 
city, location,  the  growth  of  population,  etc.  The  farmer  thus  ap- 
pears in  the  fortunate  position  of  one  who  grows  rich  while  he 
sleeps,  in  contrast  to  the  mine  owner  whose  patrimony  is  wasted 
with  every  blast  of  dynamite  under  ground.  In  reality,  however, 
the  increase  in  land  value  is  offset  to  a  considerable  extent  by 
the  fact  that  the  farmer  receives  a  much  lower  profit  from  his 
business1  and  a  smaller  return  on  his  investment.  Investigations 
in  many  parts  of  the  country  have  shown  that  such  is  the  case 

1  Ibidem,  p.  18.     See  also  P.  J.  Miller,  Assessment  of  Mining  Property, 
Report  of  Arizona  State  Tax  Commission,  1914,  P.  61. 


94  MINE  TAXATION  IN  MONTANA 

and  that  the  farmer  is  content  with  a  return  which  would  not 
be  considered  satisfactory  in  any  other  business,  but  that  he 
hopes1  to  make  up  the  difference  in  the  future  as  a  result  of  an 
advance  in  the  price  of  his  land. 

This  brings  us  to  the  second  point  in  Mr.  Kelly's  argument, 
namely,  that  it  would  be  unjust  to  tax  the  ore  in  advance  of 
its  extraction  because  such  a  tax  would  fall  on  "a  speculative 
valuation."  The  fact  is,  however,  that  such  a  speculative  ele- 
ment enters  into  the  assessment  of  land  and  other  property.  It 
has  been  pointed  out  long  ago  that 

"in  a  country  which  is  growing  in  population  and  wealth, 
and  where  land  rents  are  consequently  increasing,  the  sell- 
ing value  of  land  is  apt  to  be  somewhat  greater  than  a  cap- 
italization of  the  amount  of  income  it  is  yielding  at  the  time 

of    the    sale    would    justify This  is 

because  .....  the  prospectively  larger  future  incomes 
are  taken  into  account  in  the  process  of  capitalization."  * 

It  is  a  familiar  fact  that  in  most  agricultural  regions  of  the 
country  the  market  prices  of  land  are  considerably  in  advance 
of  rental  or  productive  value,  and  that  this  is  due  to  the  ten- 
dency of  farmers  to  capitalize  the  anticipated  rise  in  the  value 
of  their  land.2  In  other  words,  the  selling  value  of  agricultural 
land  contains  a  speculative  element,  and  this1  is  true  to  some 
extent  of  other  forms  of  property.  When  such  land  is  assessed 
in  accordance  with  law  at  its  true  or  cash  value  which  means 
selling  value,  it  is  actually  assessed  on  a  "  speculative  valuation. " 
It  is  claimed  that  the  speculative  element  in  the  case  of  a  mine  is 
greater  and  involves  greater  uncertainty  than  in  the  case  of  land 
or  other  property.  This  claim  is  discussed  in  a  subsequent 
chapter. 

The  basic  objection,  however,  is  urged  that  a  tax  on  the  total 
estimated  ore  deposits  of  a  mine  would  be  "cumulative  in  char- 
acter" and  would  destroy  the  value  of  a  mine.  But  under  the 
general  property  tax,  all  taxes  on  all  other  classes'  of  property 
are  "cumulative."  A  farm  which  is  valued  at  $50,000  and 
which  pays  taxes  at  the  rate  of  30  mills,  would  be  taxed  in  thirty- 
three  years  the  total  amount  of  its  full  value  without  compound- 

1  Richard  T.  Ely,  Outlines  of  Economics  (3d  ed.),  P-  419. 

2  Nourse,  op.  cit.,  P.  636. 


EXHAUSTIBILITT  OF  MINERAL  RESOURCES      95 

ing  interest.  Every  merchant  or  manufacturer  or  house-owner 
actually  pays  such  ' '  cumulative ' '  taxes  and  does  in  the  course  of 
time  pay  out  in  taxes  an  amount  equal  to  the  full  price  of  the 
property.  But  such  * '  cumulative ' '  taxes  do  not  destroy  the  value 
of  any  property.  The  reason  is  simple.  Taxes  are  counted  as  an 
item  of  expense  in  every  business  or  in  the  use  of  any  property 
and  are  deducted  from  earnings  before  profits  are  determined. 
The  s'ame  is  true  of  mines  and  mining.  A  "cumulative"  tax  of 
reasonable  amount  can  destroy  the  value  of  a  mine  only  on  the 
assumption  that  the  ore-body  is  not  worked  but  is  held  in  reserve 
for  speculative  or  other  purposes.  Under  such  conditions  it  may 
be  true  that  a  tax  of  three  per  cent  on  an  "ore-body  held  in 
reserve  for  33 J  years"  would  destroy  its  total  present  value.1 
But  the  same  would  be  true  of  a  stock  of  perishable  merchandise 
or  a  shoe  factory  or  an  office  building  held  in  reserve  instead  of 
being  put  to  productive  use.  Even  the  value  of  agricultural  or 
urban  land  can  be  destroyed  in  this  way,  if  withheld  from  pro- 
duction for  a  sufficiently  long  period.  The  argument  for  the  spe- 
cial taxation  of  idle  land  derives  its  force  from  this  very  fact. 
In  the  cas'e  of  a  mine  that  was  worked,  the  "cumulative"  char- 
acter of  taxation  would  have  only  a  minor  significance.  The 
amount  of  taxes  would  grow  less  with  the  decrease  in  value 
which  would  follow  the  extraction  of  definite  quantities  of  ore, 
if  no  new  ore  deposits  were  discovered  in  the  mine.  Taxes 
would  be  paid  out  of  earnings  and  not  out  of  the  value  of  the 
property. 

That  the  "cumulative"  nature  of  property  taxes  cannot  de- 
stroy the  value  of  a  mine  is  clearly  illustrated  by  the  s'o-called 
"porphyry"  copper  mines  of  Arizona,  Utah,  and  Nevada.  The 
nature  of  those  deposits  is  such  that  the  tonnage  and  grade  of 
ore  reserves  permit  of  a  reliable  estimate.  The  total  developed 
ores  in  these  mines,  on  the  basis  of  the  1917  rate  of  production, 
assures  a  life  of  16  years  to  Inspiration,  18  years  to  Nevada 
Consolidated,  25  years  to  Ray  Consolidated,  and  so  on.2  The 
mines  in  Arizona  are  assessed  at  a  valuation  which  takes  into 
account  the  total  ore  reserves.  The  assessment  of  copper  mines 

1  W.  L.  Uglow,  Methods  of  Mine  Valuation  and  Assessment,  p.  46. 
2L.  H.  Goodwin,  "The  Porphyry  Coppers,"  Engineering  and  Mining 
Journal,  November  2,  1918. 


96  MINE  TAXATION  IN  MONTANA 

in  Michigan  are  also  "cumulative"  in  the  sense  that  a  valuation 
is  placed  on  the  total  estimated  ore  reserves.  Yet  the  value  of 
the  copper  mines  in  either  state  has  not  been  destroyed.1 

The  idea  that  every  ton  of  ore  in  the  ground,  long  before 
being  reached,  bears  a  part  of  all  the  taxes  ever  paid  on  the 
mine  is  based  upon  a  misunderstanding  of  the  nature  of  taxa- 
tion. It  is  true  that  under  the  prevailing  system  in  Montana, 
as  in  most  other  states,  taxes  are  assessed  on  property  as  meas- 
ured by  its  market  value.  But  this  is  a  mere  method  of  obtain- 
ing a  basis  for  taxation  and  does  not  alter  the  fact  that  taxes  are 
really  paid  out  of  current  or  anticipated  earnings.  The  farmer 
pays  his  annual  taxes'  out  of  the  annual  produce  of  his  farm ;  the 
manufacturer  out  of  the  earnings  of  his  factory,  and  so  on.  The 
mine  owner  is  in  the  same  condition.  A  producing  mine  is  ex- 
pected to  yield  a  certain  annual  income  for  a  certain  number  of 
years.  This  estimated  income  is  capitalized  and  forms  the  value 
of  the  mine.  "When  this  value  is  assessed  for  purposes  of  taxation 
the  taxes  are  paid  as  they  fall  due  from  the  annual  earnings  of 
the  mine.  The  Anaconda  Company,  in  particular,  has  followed 
the  practice  of  including  taxes  in  general  operating  expenses. 

The  complicated  structure  built  upon  the  fact  of  the  exhausti- 
bility  of  mineral  deposits  thus  crumbles  into  nothingness.  Even 
the  homely  simile  of  the  piece  of  cheese  is  a  logical  fallacy.  The 
comparison  must  assume  that  the  piece  of  cheese  has  a  definite 
place  in  our  complex  economy.  It  may  be  a  piece  of  cheese  in 
mother's  pantry.  In  that  case  it  is  one  of  those  pieces  of  personal 
property  which  will  surely  escape  the  most  keen-eyed  assessor. 
But  the  piece  of  cheese  may  also  be  merchandise  in  the  grocery 
department  of  one  of  our  well-conducted  mercantile  establish- 
ments. Suppose  '  *  the  piece  of  cheese ' '  is  large  enough  and  fresh 
enough  to  last  three  years  without  deterioration.  The  assessor, 
of  course,  cannot  miss  such  a  huge  and  odorous  thing.  He  will 
assess  it  on  its  full  value  the  first  year ;  then  he  will  assess1  what 
is  left  after  the  first  year 's  sale  the  following  year ;  and  the  third 
year  he  will  again  assess  the  remainder  a  third  time.  Evidently, 
the  cheese  is  made  to  bear  a  "cumulative"  tax.  But  the  value 
of  the  last  piece  of  cheese  to  the  merchant  is  no  less  than  that  of 

1  For  a  fuller  discussion  of  methods  of  mine  taxation  see  Chapter  X. 


EZHAUSTIBILITY  OF  MINERAL  RESOURCES      97 

the  first.  If  he  has  any  business  sense  at  all,  he  sells  his  cheese 
at  a  price  which  not  only  returns  the  original  cost,  selling  costs, 
taxes,  and  other  expenses,  but  a  goodly  profit.  If  a  mine  is  com- 
parable to  a  piece  of  cheese,  it  is  evidently  subject  to  the  same 
economic  laws.  While  it  lasts,  it  pays  taxes  out  of  what  it  earns. 
After  it  has  been  consumed,  it  ceas'es  to  pay  taxes. 


CHAPTER  IX. 

THE  ASSUMPTION  OF  RISK  IN  MINING. 

The  speculative  character  of  mining  has  had  and  still  has  a 
large  place  in  all  discussions  of  mine  taxation.  Those  who  de- 
mand special  consideration  for  the  mining  industry  are  in  the 
habit  of  pointing  to  the  ' '  fascinating  gamble  of  mine  operation. ' ' 
In  their  opinion  the  hazard  of  mining  is  far  greater  than  that  of 
any  other  business,  and  places  mining  in  a  class  by  itself.  Con- 
sidering the  State  of  Montana  onljr,  it  has  been  said  that  "mil- 
lions upon  millions  of  dollars  have  been  spent  in  this  state  in 
mining  ventures  that  have  never  returned  to  the  investor  one 
dollar  in  the  way  of  reimbursement,"  and  that  in  "the  Butte 
camp  there  are  operating  today,  because  of  conditions  which 
create  a  favorable  expectancy,  single  mines1  upon  which  many 
millions  of  dollars  have  been  expended  that  have  never  returned 
a  dividend. " x  It  has  also  been  asserted  that  mining  as  a  whole 
has  never  been  profitable,  and  that  more  money  has  been  put 
into  mines  than  ever,  was  or  ever  will  be  taken  out  of  them. 

The  problem  is  undoubtedly  very  important  and  is*  in  need 
of  a  clear  and  careful  analysis.  Whether  we  are  aware  of  it  or 
not,  there  is  an  element  of  risk  in  everything  we  plan  or  do.  The 
sure  things  in  life  are  few,  if  any.  Every  form  of  human 
activity  has  its  minor  and  major  risks.  The  wage  earner  is  sub- 
ject to  the  risk  of  accident  and  industrial  disease ;  the  commercial 
traveler  bears1  the  risk  of  accident  on  the  train;  the  physician 
assumes  the  hazard  of  infection  and  all  that  it  entails.  In  a  word, 
life  involves  the  taking  of  chances  in  a  greater  or  less  degree 
constantly  and  continuously. 

Aside  from  the  hazards  which  are  common  to  most,  if  not  all, 
phases  of  human  endeavor,  the  risk  peculiar  to  business  may  be 
defined  as  the  hazard  of  total  or  partial  failure.  More  concrete- 
ly this  means  the  danger  of  total  or  partial  loss  of  either  the 
capital  invested  in  business,  or  of  the  return  on  the  investment, 

1  C.  F.  Kelly,  Mining  Taxation  in  Montana,  p.  14. 

98 


THE  ASSUMPTION  OF  RISK  IN  MINING  99 

or  of  both.  Every  business  failure  usually  means  a  loss  of  in- 
terest or  dividends  for  some  period  of  time  and  a  loss  of  part  or 
of  all  of  the  capital  represented  by  the  business. 

It  is  the  general  opinion  of  economic  writers  that  the  so-called 
entrepreneur  assumes1  the  risks  of  business  and  that  his  profits 
are  the  reward  for  risks  assumed.  Where  business  is  conducted 
by  large  corporations  whos'e  capital  is  contributed  by  many  large 
and  small  investors,  the  stockholders  are  those  who  take  the  risk 
and  who  find  their  reward  in  dividends  received.  This,  however, 
disregards  the  element  of  risk  in  bonds.  Few  bondholders  can 
be  absolutely  sure  that  they  take  no  risks'  in  placing  their  faith 
in  the  bonds  held.  It  is,  therefore,  more  proper  to  say  that  the 
risks  of  business  are  distributed  among  those  who  lend  their 
money  on  interest  only  and  those  who  assume  the  risks1  of  owner- 
ship and  control,  though  the  much  greater  risk  is  carried  by  the 
latter. 

The  losses  in  business  may  take  place  in  two  ways.  A  business1 
may  fail  bringing  total  or  partial  loss  to  all  those  who  have  an 
interest  in  it.  Or  an  individual  investor  may  buy  and  sell  stock 
in  a  corporate  enterprise  in  a  manner  which  will  result  in  loss  to 
him,  though  the  business  as  a  whole  may  be  profitable  in  the 
long  run.  Different  elements  of  risk  are  involved  in  these  two 
procedures,  and  in  estimating  the  hazard  of  any  particular  busi- 
ness or  industry  these  two  sources  of  los's^  must  be  kept  distinct. 

Taking  business  as  a  whole,  the  extent  of  the  risk  involved  is 
very  large.  It  has  frequently  been  said  that  ' '  90  per  cent  of  all 
men  who  enter  business  fail  at  s'ome  time  or  other  in  their 
business  career,"  and  that  "if  the  losses  of  business  could  be 
averaged  against  the  profits,  it  would  clearly  appear  that  the 
average  business  man  is  fortunate  if  he  secures  fair  wages  of  su- 
perintendence and  a  moderate  return  on  his  capital  investment. ' '] 
An  effort  to  measure  more  accurately  the  risks  of  business  from 
year  to  year  is  made  by  Dun's  Review  which  publishes  annual 
statistics  of  commercial  failures  in  the  country.  Table  XXVI 
presents  a  summary  of  the  significant  facts  for  the  ten  years 
1908-1917. 

1  Sherwood  Meade,  Economics  (Modern  Business,  Vol.  I),  p.  288. 


100 


MINE  TAXATION  IN  MONTANA 


TABLE  XXVI. 


Year 

No.  of 
failures 

No.  of  busi- 
ness concerns 

Per  cent  of 
failures 

Total 
liabilities 

1917 

13,855 

1,733,225 

.80 

$182,441,371 

1916 

16,993 

1,707,639 

.99 

196,212,256 

1915 

22,156 

1,674,788 

1.32 

302,286,148 

1914 

18,280 

1.655,496 

1.10 

357,908,859 

1913 

16,037 

1,616,517 

.99 

292,672,288 

1912 

15,452 

1,564,279 

.98 

203,117,391 

1911 

13,441 

1,525,024 

.81 

191,061,665 

1910 

12,652 

1,515,143 

.80 

201,757,097 

1909 

12,924 

1,486,389 

.80 

154,603,465 

1908 

15,000 

1,447,554 

1.08 

222,315,684 

These  figures  include  manufacturing,  trading  and  other  com- 
mercial enterprises.  They  do  not  include  banks  or  railroads.  To 
supplement  the  above  figures,  Tables  XXVII  and  XXVIII  pre- 
sent the  failures  of  banks  and  railroads  for  the  five-year  period, 
1913-1917. 

TABLE  XXVII. 


National  banks 

All  other  banks 

Total 

No.  of 

Total 

Tear 

bank 
failures 

liabilities 

Number 

Liabil- 
ities 

Number 

Liabil- 
ities 

1917 

42 

$18,451,964 

4 

$  3,700,000 

38 

$14,751,964 

1916 

50 

10,396,779 

8 

1,755,000 

42 

8,641,799 

1915 

133 

37,223,234 

18 

13,649,000 

115 

23,574,234 

1914 

212 

56,005,107 

19 

9,606,098 

193 

46,399,009 

1913 

120 

31,546,314 

7 

5,197,336 

113 

26,348,978 

TABLE  XXVIII. 


Foreclosure  sales  of  railroads 

Year 

Number  of 
roads 

Mileage 

Stocks  and  bonds 
outstanding 

1917 

20 

10,963 

$557,846,348 

1916 

26 

8,355 

703,444,855 

1915 

11 

3,914 

285,258,782 

1914 

9 

1,470 

83,189,500 

1913 

6 

1,159 

86,163,850 

THE  ASSUMPTION  OF  RISK  IN  MINING        101 

The  above  three  tables  suggest  the  extent  of  total  and  partial 
loss1  in  all  branches  of  business.  From  Table  XXVI  it  may  be 
seen  that  in  manufacturing  and  trading  alone  there  were  156,790 
failures  between  1908  and  1917.  During  the  same  period  the 
total  number  of  business  concerns  increased  from  1,447,554  to 
1,733,225,  that  is1,  by  285,671.  In  other  words,  the  number  of 
failures  was  54.8  per  cent  of  all  new  enterprises. 

But  even  this  figure  does  not  present  a  complete  picture,  for 
it  does  not  include  "  numberless  instances'  of  financial  embarrass- 
ment which  are  settled  out  of  court the  still  larger 

number  of  cases  where  a  business  concern  gradually  sinks  its 
capital  until  finally  the  enterprise  is  sold  or  is1  transferred  on 
some  contractual  basis,  thus  bringing  the  enterprise  into 
the  hands  of  new  men  who  supply  fresh  capital  which 
is  either  sunk  or  makes  the  business1  a  success."  It  is 
also  known  that  thousands  of  small  retail  stores  and  of 
many  other  business1  lines,  in  which  full  and  accurate  accounts 
are  not  kept,  lose  money  continuously  over  a  period  of  years, 
without  even  the  proprietor  being  aware  of  it.  If  all  these  fail- 
ures and  losses  could  be  accurately  measured,  the  picture  would 
be  really  appalling.1 

The  causes  of  failures  have  been  grouped  into  two  main  classes : 
causes  for  which  the  management  of  the  failing  concern  may  be 
held  responsible,  and  outside  factors  over  which  the  business 
can  exercise  little  or  no  control.  In  the  first  class  are  such 
causes  as  lack  of  capital,  incompetence,  bad  financial  policy, 
granting  of  unwise  credits,  etc.  The  second  class  includes  losses 
by  storms,  floods,  failures  of  other  concerns,  changes  in  demand, 
severe  competition,  etc.  It  is  estimated  that  about  80  per  cent 
of  all  failures  are  due  to  causes  of  the  first  class  and  about  20 
per  cent  to  those  of  the  second  class.  The  most  important  and 
frequent  causes  of  failure  necessarily  vary  from  industry  to  in- 
dustry, and  the  hazard  of  any  one  industry  depends  to  a  very 
large  extent  upon  the  nature  of  the  causes  which  are  most  fre- 
quently responsible  for  failure. 

No  data  are  available  for  a  comprehensive  comparison  of  the 
relative  risks  of  different  kinds  of  business  enterprise.  As  the 

1  William  Lough,  Business  Finance,  P.  574. 


102  MINE  TAXATION  IN  MONTANA 

issue  in  Montana  is  largely,  if  not  entirely,  between  the  mining 
companies  and  the  farmers,  it  may  be  well  to  quote  expert  opin- 
ion on  the  relative  hazard  of  the  two  industries.  The  risks  of 
farming  are  well  emphasized  in  the  following  quotation : 

"The  farmer  supplies  the  capital  for  production  and  takes 
the  risk  of  his  losses ;  his  crops  are  at  the  mercy  of  drought, 
and  flood,  and  heat,  and  frost,  to  say  nothing  of  noxious  in- 
sects and  blighting  diseases.  He  supplies  hard,  exacting,  un- 
remitting labor.  A  degree  and  range  of  information  and  intel- 
ligence are  demanded  by  agriculture  which  are  hardly  equaled 
in  any  other  occupation.  Then  the  risk  of  overproduction 
and  disastrously  low  prices.  From  beginning  to  end,  the 
farmer  must  steer  dexterously  to  escape  perils  to  his  prof- 
its and  indeed  to  his  capital  on  every  hand."  1 

This  is  a  picture  of  farming  as  it  is  carried  on  throughout  the 
country.  Those  who  live  in  Montana  need  not  be  told  that  the 
chances  of  farming  in  this  section  of  the  country  are  infinitely 
greater  because  of  the  quality  of  the  land  and  of  the  system  of 
agriculture  in  use.  The  following  quotation  deserves  attention 
because  it  sums  up  so  well  the  ideas  of  the  western  farmer  on 
the  subject: 

"In  the  West chances  are  a  hundred  to  one 

against  the  farmer.  The  wheat  crop  is  a  gamble  pure  and 
simple.  Big  crops  mean  big  fortunes.  A  failure  on  a  crop 
means  ruin.  You  can  talk  your  head  off  to  the  farmer 
about  the  folly  of  depending  on  a  one-crop  system,  of  put- 
ting all  his  eggs  in  one  basket,  and  so  forth ;  as  long  as 
one  year's  crop  may  mean  a  fortune,  western  farmers  will 

chance  all  on  that  one  crop Whether  he  can  pay 

his  debts,  whether  the  mortgage  will  be  foreclosed,  whether 
he  can  build  a  house  and  educate  the  'kids,'  and  buy  a  motor 
and  take  a  vacation  that  he  really  needs, — all  depends  on  the 
fickle  jade  called  Fate  from  August  to  September.  No  Wall 
Street  broker  hanging  by  the  margin  of  an  eyebrow  to  win 
a  fortune  ever  feels  more  of  a  gambler's  agonies  than  the 
western  wheat  farmer  in  a  year  when  the  wet  spring  has 

delayed  seeding It  may  be  added  that  'wheat' 

is  by  no  means  the  only  agricultural  venture  about  which 
this  story  of  farmer's  speculation  might  be  told.  The  cattle- 
feeder  takes  long  chances  in  the  hope  of  making  large  gains. 
The  southern  truck -grower  may  stake  his  all  on  a  big 

1  United  States  Department  of  Agriculture,  Yearbook  for  1910,  P-  26. 


THE  ASSUMPTION  OF  RISK  IN  MINING        103 

acreage  of  tomatoes  or  onions ;  the  westerner  plunges  in 
fruit,  sugar  beets  or  cantaloupes."  l 

In  contrast  with  the  above  statements  of  general  and  special 
risks  inherent  in  farming,  the  opinions  of  mining  operators  and 
investment  experts  on  the  hazards  of  mining  are  very  favorable 
indeed.  One  of  them  writes : 

"The  admission  must  be  made  with  regret  that 
most  mining  companies  are  failures,  but  while  this 
is  true  of  mining,  it  is  also  true  of  other  companies,  for 
the  records  show  that  90  per  cent  of  corporations  are  fail- 
ures and  go  out  of  existence,  many  of  them  after  only  a 
year's  existence.  This  being  the  fact  it  must  be  admitted 
that  failures  in  mining  are  not  more  frequent  than  among 
ordinary  corporations"  2 

This  is  a  comparatively  conservative  statement.  But  one  whose 
mining  experience  has  been  world-wide  and  whose  opinion  has 
probably  more  weight  than  that  of  any  other  man  of  his  time, 
namely,  Mr.  Cecil  Rhodes,  made  a  far  more  favorable  statement  on 
the  superior  advantages'  of  mining.  His  statement  is  of  greater 
value  also  because  it  has  greater  precision.  Says  Mr.  Cecil 
Rhodes : 

"I  have  made  a  great  study  of  the  mining  question  and 
have  statistics  not  only  of  Great  Britain  and  Africa,  but  of 
the  world,  carefully  compiled,  related  to  this  proposition, 
so  that  I  ought  not  to  be  in  error My  investiga- 
tion ....  shows  that  farming  is  more  risky  than  mining; 
that  29  per  cent  more  people  lose  money  and  fail  in  the 
mercantile  business  than  in  mining,  and  that  41  per  cent 
more  lose  money  in  the  manufacturing  business  than  in 
mining,  and  17  per  cent  more  men  lose  money  in  any  other 
business  than  in  mining.  I  believe  that  investment  in  good 
mining  stock  is  the  most  profitable  investment  and  very 
much  the  safest ;  and  is  the  safest  because  your  security  is 
the  ore  itself."  3 

Reliable  and  expert  mining  engineers  have  for  years  pointed 
out  that  a  major  part  of  the  losses  incurred  in  mining  are  due, 
not  to  the  hazards  inherent  in  the  industry,  but  to  the  general 
speculative  tendency  of  the  public  which  clings  to  mining  as  the 

1  Nourse,  op.  cit.,  pp.  878-9. 

2  Francis  C.  Nicholas,  Mining  Investments,  p.  27. 

3  National  Tax  Association,  Proceedings  for  1914,  P-  345. 


104  MINE  TAXATION  IN  MONTANA 

most  attractive  outlet  for  its  gambling  propensities.1  The  his- 
tory of  mining  and  the  spectacular  instances  of  great  fortunes 
made  in  it  keep  alive  the  faith  in  the  possibilities  of  a  "lucky 
strike"  and  prompt  people  to  stake  their  all  on  a  chance.  Re- 
gardless of  good  advice  to  the  contrary,  large  numbers  persist 
in  "taking  a  flier"  in  mining  and  place  their  money  with  such 
little  care  and  discretion  that  a  similar  procedure  would  ruin 
the  reputation  for  common  sense  of  an  investor  in  any  other  se- 
curities. High  sounding  and  "flamboyant"  prospectuses  and 
imaginative  "literature"  in  the  form  of  circular  letters,  etc., 
are  still  effective  in  connection  with  mining  ventures  which  would 
arouse  only  amusement  in  the  case  of  ordinary  business  enter- 
prises. Investments  are  made  without  proper  investigation  into 
the  character  of  the  persons  promoting  the  enterprise  or  into  the 
nature  of  the  property.  The  failure  to  employ  competent  en- 
gineers to  report  on  the  property  is  one  of  the  causes'  most 
"prolific  in  unfortunate  results." 

This  cause  of  loss  probably  more  than  any  other  is  responsible 
for  a  large  share  of  the  greater  risks  of  mining.  It  is  clear,  how- 
ever, that  the  mining  industry  cannot  and  should  not  be  burdened 
with  responsibility  for  such  losses.  A  considerable  part  of  such 
"losses"  are  not  losses  in  the  real  sense  of  the  term,  but  mere 
transfers  of  money.  A  clever  and  persuasive  promoter  who  suc- 
ceeds in  directing  the  flow  of  money  from  the  pockets  of  credu- 
lous investors  into  his  own,  on  a  promise  which  has  no  basis  in 
property  or  anything  else,  merely  effects  a  transfer  of  values 
to  his  own  advantage.  His  operations  are  based  on  the  assump- 
tion that  ' '  a  fool  and  his  money  are  soon  parted. ' '  But  even  in 
those  cases  where  the  money  invested  is  applied  to  the  process  of 
mining  and  is  lost,  the  burden  of  responsibility  does'  not  rest 
upon  the  industry,  if  no  proper  preliminary  investigations  are 
made.  Mining  has  developed  a  highly  complex  and  scientific 
technique,  as  a  means  of  guidance  and  precaution,  and  those  who 
fail  to  avail  themselves  of  this  technique  should  blame  themselves1 
for  the  consequences. 

Another  cause  which  is  prolific  of  loss  in  mining  lies  in  the 

2  F.  C.  Nicholas,  Mining  Investments,  p.  30. 

1  Percy  William,  "Causes  of  Failure  in  Mining,"  Engineering  and  Min- 
ing Journal,  January  31,  1903. 


THE  ASSUMPTION  OF  RISK  IN  MINING        105 

eagerness  to  inflate  the  value  of  the  property  by  means  of  im- 
proper financial  policies.  Mines  are  only  too  often  capitalized 
for  an  assumed  worth  which  is  not  even  warranted  by  prospective 
possibilities.  To  arouse  interest  in  the  property,  dividends  are 
frequently  declared  where  no  real  profits  can  be  shown,  the  pay- 
ments being  made  from  the  capital  invested.  The  promoters  who 
indulge  in  these  and  similar  practices  are  usually  eager  for  large 
and  quick  profits  and  have  but  a  secondary  interest  in  the  wel- 
fare of  the  enterprise.  The  burden  of  over-capitalization,  the 
failure  to  provide  for  contingencies,  the  eagerness  to  pay  divi- 
dends at  any  cost,  account  for  many  failures  in  mining  which 
might  otherwise  have  been  a  success. 

A  third  cause  of  failure  is  unwise  management.  It  has  been 
pointed  out  repeatedly  that  many  a  failure  in  mining  has1  oc- 
curred because  machinery  was  acquired  before  the  character  of 
the  ore  was  known  and  its  proper  treatment  ascertained;  or  be- 
cause mills  and  reduction  works  were  built  before  the  exact 
process  required  by  the  ore  was  fully  established;  or  because 
smelters  and  reduction  works  were  erected  when  there  was1  not 
enough  ore  to  keep  the  mill  in  steady  operation.  The  failure  to 
insist  on  frequent  and  complete  reports,  the  impatience  of  in- 
vestors with  competent  and  careful  managers  and  superintend- 
ents who  would  not  accede  to  unwarranted  demands,  and  many 
similar  causes  have  been  found  time  and  again,  singly  or  in  com- 
bination, to  account  for  mining  failures'  which  were  otherwise 
not  inevitable. 

The  desire  to  speculate,  bad  financial  policy,  and  unwise  man- 
agement may  be  more  frequent  causes  of  failure  in  mining  than 
in  other  industries.  But  they  are  in  no  way  peculiar  to  mining. 
As  indicated  above,  these  causes  grouped  in  class  one,  as  those 
for  which  the  management  may  be  held  responsible,  account  for 
80  per  cent  of  all  business  failures.  The  important  thing  about* 
this  group  of  causes  is  that  they  are  subject  to  human  control. 
A  better  business  education,  more  intensive  commercial  training, 
the  enforcement  of  higher  standards  of  honesty  and  business 
morals,  a  more  sober  and  careful  state  of  mind  on  the  part  of 
investors,  will  greatly  reduce  losses  from  these  causes  in  all  busi- 
ness, and  in  mining  in  particular. 

Apart  from  these  and  other  causes  of  failure  which  are  char- 


106  MINE  TAXATION  IN  MONTANA 

acteristic  of  all  business  enterprise,  such  as  possible  fluctuations 
in  demand  and  price,  there  is  one  source  of  risk  which  is  peculiar 
to  mining.  That  is  the  uncertainty  of  the  amount  of  commercial 
ore  in  the  mine  and  the  possibilities  of  a  decrease  in  metallic 
contents.  This  is  a  serious  cause  of  hazard.  But  the  whole  de- 
velopment of  mining,  as  a  business,  has  been  in  the  direction  of 
reducing  this  hazard  by  judicious  exploration  work  preceding 
exploitation.  Of  course,  in  mining  prospects  this  risk  is  as  great 
as  ever,  and  in  properly  calculating  the  risk  for  the  industry  as 
a  whole,  prospects  and  non-producing  mines  should  be  distin- 
guished from  producing  mines.  The  former  are  more  or  less 
speculative  ventures  and  should  be  treated  as  such.  Though  they 
occupy  a  large  place  in  the  minds  of  gamblers  and  speculators, 
the  fact  remains  that  the  great  industry  of  metal  production  is 
based  on  developed  mines,  and  in  these  the  chances  of  risk  under 
normal  conditions  can  be  calculated  in  such  a  way  as  to  reduce 
the  margin  of  error  to  a  minimum.  Fifteen  years  ago,  the  En- 
gineering and  Mining  Journal  summed  up  the  situation  in  the 
following  words : 

"Mining  undertakings  come  to  grief  so  often,  not  so  much 
on  account  of  failure  to  attain  an  investment  basis,  but 
because  they  are  not  put  on  a  business  basis.  People  play 
the  fool  and  expect  miracles  to  happen.  The  same  pro- 
cedure would  ruin  a  grocery  establishment.  Because  the 
occurrence  of  ore  in  nature  is  uncertain,  and  mining  as  a 
consequence  must  necessarily  be  speculative,  there  is  no 
reason  for  piling  human  foolishness  on  the  top  of  nature's 
niggardliness.  Of  well-conducted  mining  enterprises  it  can 
be  said  that  they  meet  with  a  percentage  of  success  as  large 
[as],  if  not  larger  than,  any  ordinary  manufacturing  under- 
taking. The  smashes  are  more  spectacular  and  the  suc- 
cesses are  more  magnificent  in  the  former  case,  but  the 
average  result  does  not,  as  a  rule,  favor  the  apparently 
safer  form  of  industry."  * 

Since  those  words  were  penned,  much  progress  has'  been  made 
both  in  the  technique  of  mining  and  in  the  understanding  of 
mining  finance.  Such  universally  known  and  expert  mining  en- 
gineers as  J.  B.  Finlay  and  Herbert  C.  Hoover  have  pointed  out 

1  Engineering  and  Mining  Journal,  March  21,  1903. 


THE  ASSUMPTION  OF  RISK  IN  MINING        107 

that  under  proper  and  conservative  management  the  losses  in 
mining  can  be  considerably  reduced.     Says  Mr.  Finlay : 

"It  is  no  argument  to  say  that  mining  shares  are  mainly 
used  as  counters  in  a  game.  That  is  partly  true.  That  it 
is  true  at  all,  to  any  greater  extent  in  the  case  of  mines  than 
for  other  securities,  is  due  only  to  the  fact  that  a  portion  of 
the  public  is  imposed  upon  by  false  analogies.  In  other 
words,  they  are  often  induced  to  buy  highly  speculative 
mining  stocks  on  the  same  income  basis  as  they  buy  the 
soundest  securities.  The  very  mining  shares  that  I  have 
called  'highly  speculative'  might  in  many  instances  at  a 
sane  valuation  be  just  as  'sound'  as  the  soundest" 

Mr.  Finlay  says  further : 

"The  great  fault  with  the  mining  business  from  the  point 
of  view  of  the  moderate  investor  is  that  it  is  very  easy  for 
the  sake  of  a  fair  amount  of  interest  to  lose  the  principal. 
There  is  no  need  of  this.  By  studying  out  the  vital  ques- 
tion of  the  life  of  a  mine  with  its  concurrent  rate  of  amorti- 
zation, and  by  steadily  refusing  to  believe  that  the  current 
construction  is  'capital,'  one  may  eliminate  overvalued  prop- 
erties pretty  rapidly."  i 

The  same  ideas1  are  defended  by  Mr.  Hoover  in  his  standard 
work,  The  Principles  of  Mining.  According  to  Mr.  Hoover,  when 
estimates  of  the  value  of  a  mine  are  based  on  properly  secured 
data  for  "proved  ore,"  there  is  "absolutely  no  hazard"  in  so 
far  as  "continuity  in  metal  contents"  and  "in  volume  through 
the  estimated  area"  is  concerned.  Mr.  Hoover  also  maintains 
that  risks  of  management,  appreciation  of  costs,  changes  in  met- 
allurgical treatment  and  price  of  metal  may  be  largely  eliminated 
by  conservative  and  proper  methods  of  calculation.  Mr.  Hoover's 
conclusion  may  be  summarized  in  his  own  words: 

"Mining  has  reached  such  a  stage  of  development  as  a 
science  that  management  proceeds  upon  comparatively  well 
known  lines.  It  is  subject  to  known  checks  through  the  op- 
portunity of  comparisons  by  which  efficiency  can  be  de- 
termined in  a  manner  more  open  for  the  investor  to  learn 
than  in  any  other  form  of  industry.  While  in  mining  an 
estimate  of  a  certain  minimum  of  extension  in  depth,  as 
indicated  by  collateral  factors,  may  occasionally  fall  short, 
it  will  in  nine  cases  out  of  ten  be  exceeded.  If  investment 

1 J.  R.  Finlay,  The  Cost  of  Mining,  p.  51. 


108  MINE  TAXATION  IN  MONTANA 

in  mines  be  spread  over  ten  cases,  similarly  valued  as  to 
depth  of  extension,  the  risk  has  been  virtually  eliminated. 
The  industry,  if  reduced  to  the  above  basis  for  financial 
guidance,  is  a  more  profitable  business  and  is  one  of  less 
hazards  than  competitive  forms  of  commercial  enterprises."  * 

Mr.  Hoover  is  emphatic  in  laying  the  blame  for  any  other 
opinion  which  is  in  vogue  about  the  risks  of  mining  where  it 
belongs.  He  continues  as  follows: 

"Unfortunately  for  the  reputation  of  the  mining 
industry  and  metal  mines  especially,  the  business  is 
often  not  conducted  or  valued  on  lines  which  have  been 
outlined  in  these  chapters.  There  is  often  the  desire  to 
sell  stocks  beyond  their  value.  There  is  always  the  pos- 
sibility that  extension  in  depth  will  reveal  a  glorious  El- 
dorado. It  occasionally  does,  and  the  report  echoes  round 
the  world  for  years,  together  with  tributes  to  the  great 
judgment  of  the  exploiters.  The  volume  of  sound  allures 
undue  numbers  of  the  venturesome,  untrained,  and  ill- 
advised  public  to  the  business  together  with  a  mob  of  camp- 
followers  whose  objective  is  to  exploit  the  ignorant  by 
preying  on  their  gambling  instincts.  Thus  a  considerable 
section  of  metal  mining  industry  is  in  the  hands  of  these 
classes  and  a  cloud  of  disrepute  hangs  ever  in  the  hori- 
zon." 2 

Such  a  condition  can  be  remedied  only  by  education  and  the 
dissemination  of  correct  information  on  the  subject.  It  is1  hardly 
proper  to  encourage  the  exaggerated  idea  of  the  hazards  of  min- 
ing in  the  popular  mind  even  for  the  purpose  of  any  possible 
advantage  in  matters  of  taxation.  The  views  of  Cecil  Rhodes, 
Hoover,  Ingals,  the  editors  of  the  Engineering  and  Mining  Jour- 
nal, and  others,  must  be  made  common  knowledge.  These  views 
do  not  imply  the  possibility  of  eliminating  all  speculative  ele- 
ments from  mining.  That  is  unthinkable  not  only  in  mining  but 
in  many  another  business.  But  the  statements  quoted  above  and 
the  facts  on  which  they  are  based  do  make  it  clear  that  the  neces- 
sary assumption  of  risk  in  mining  is,  with  some  exceptions',  not 
greater  than  in  many  other  industrial  enterprises.  This  fact 
makes  the  claim  for  the  special  taxation  of  mines  based  upon 
the  argument  of  risk  more  doubtful  and  less  readily  acceptable. 

1  Herbert  C.  Hoover,  Principles  of  Mining,  p.  183.    Italics  mine. 
2H.  C.  Hoover,  op.  cit.,  P.  184. 


THE  ASSUMPTION  OF  RISK  IN  MINING        109 

Of  course,  some  people  interested  in  mining  ventures  will  con- 
tinue to  indulge  in  practices  condemned  by  all  those  who  have 
knowledge  and  experience  and  who  wish  to  place  the  industry 
on  a  higher  plane  of  security.  These  people  must  bear  the  con- 
sequences of  their  own  practices.  Their  folly  is  no  excuse  for 
absolving  others  from  their  duty. 

The  degree  of  risk  involved  in  mining  in  Montana  is  a  specific 
question  which  could  be  answered  only  on  the  basis  of  a  careful 
examination  of  all  the  data  relating  to  the  subject.  The  dis- 
tinction between  prospects  and  developed  mines  which  was  made 
above  must  be  kept  in  mind  in  considering  the  Montana  situation. 
It  is  generally  conceded  that  the  former  present  a  problem  of 
their  own.  The  discussion,  therefore,  is  here  confined  to  the  de- 
veloped mines  of  the  Butte  district.  It  is  believed  that  the  rec- 
ords of  the  A.  C.  M.  Co.  contain  extensive  data  which  permit 
close  estimates  of  the  profitableness  of  the  mines  of  the  district 
for  many  years  to  come.  These  data  are  not  available,  but  there 
is  ample  testimony  which  is  sufficiently  varied  and  reliable  to 
suggest  an  answer  to  the  question. 

In  considering  the  risk  involved  in  the  business  of  the  A.  C.  M. 
Co.,  it  is  necessary  to  remember  that  this  company  is  not  a  mere 
mining  enterprise.  It  has  been  said  that  "Montana  is  an  empire 
in  which  the  A.  C.  M.  Co.  supplies  the  major  part  of  the  raw 
material,  including  metals,  coal  and  timber. ' ' 1  But  the  A.  C.  M. 
Co.  is1  even  more  than  that,  because  it  not  only  furnishes  the  raw 
materials,  but  also  transforms  them  into  manufactured  articles. 
In  fact,  the  A.  C.  M.  Co.  is  "a  great  industrial  company  with 
important  mining  interests',  and  so  differs  from  the  mining  com- 
panies1 pure  and  simple."2  If  it  is  true  that  the  risks  of  in- 
dustrial enterprises  are  smaller  than  those  of  mining,  then  the 
Anaconda  Company  should  be  credited  with  the  greater  security 
it  derives  from  its  composite  character.  The  literature  sent  out 
by  many  of  the  brokerage  firms  of  Wall  Street  emphasize  this 
fact.  One  of  them  writes: 

1  Engineering  and  Mining  Journal,  Editorial,  November  17,  1917. 

2  Engineering  and  Mining  Journal,  Editorial,  November  24,  1917. 


110  MINE  TAXATION  IN  MONTANA 

"Anaconda  may  be  old  as  a  copper  producer,  but  it  is  in 
its  infancy  as  a  manufacturing  enterprise  and  would  seem 
to  have  many  years  of  prosperity  ahead."  x 

The  same  firm  writes  in  its  weekly  news-letter  that 

"Anaconda  is  an  investment  among  mining  stocks  with  a 
past  record  of  achievement  and  a  future  promise  second 
to  none."  2 

It  may  be  said,  however,  that  in  so  far  as  Montana  is*  con- 
cerned, the  whole  superstructure  of  the  A.  C.  M.  Co.  rests  on 
the  Butte  mines,  and  that  the  question  of  their  life  is  the  funda- 
mental one.  The  testimony  on  this  phase  of  the  subject  is  no 
less  favorable  than  that  quoted  above.  In  a  little  booklet  pub- 
lished in  July,  1916,  under  the  title  The  New  Anaconda,  the 
question  is  raised  "How  long  will  Anaconda  last?"  The  answer 
to  this  question  is  contained  in  the  following  lines : 

"It  is  the  practice  of  Anaconda  to  block  out  ore  in  ad- 
vance only  sufficient  to  meet  the  requirements  for  immediate 
operation ;  generally  speaking  approximately  two  year's 
supply  of  ore  is  carried  ahead.  If  there  were  indications 
of  diminution  of  width  or  impoverishment  in  depth,  there 
might  be  grounds  for  blocking  the  ore  out  in  advance  re- 
gardless of  the  expense  involved;  but  the  evidence  revealed 
in  the  present  lower  levels  is  precisely  to  the  contrary. 
The  development  work  done  at  the  present  low- 
est level — 3400  feet — while  not  extensive  shows  ore  of  about 
the  same  tenor  as  is  now  being  mined  in  the  upper  work- 
ings  The  engineering  and  geological  staffs, 

through  the  application  of  the  mathematical  principles  of 
geology,  are  constantly  locating  bodies  of  ore  in  parts  of 
the  upper  levels,  formerly  overlooked  in  the  course  of  the 
cruder  mining  operations  of  early  days.  These  add  mate- 
rially to  reserves.  It  must  not  be  forgotten  that  the  ex- 
pected life  of  the  deposits  has  been  prolonged  in  an  im- 
portant way  through  the  addition  of  reserves  of  ores  for- 
merly considered  of  no  value,  but  which,  under  new  metal- 
lurgical methods  already  described,  are  now  available  for 
profitable  treatment.  The  question  of  Anaconda's  life, 
therefore,  is  one  that  need  not  be  considered  for  many  years 
to  come."3 

1  Frank  Lilly  &  Co.,  August  30,  1918. 

2  Frank  Lilly  &  Co.,  November  29,  1918. 

3  I.  Eugene  Meyer  Jr.  &  Co.,  The  New  Anaconda,  p.  29. 


THE  ASSUMPTION  OF  RISK  IN  MINING         111 

Another  bit  of  testimony  was  furnished  a  few  years  ago  by 
Mr.  Horace  Baker,  editor  of  the  Copper,  Curb  amd  Mining  Out- 
look, in  a  review  of  the  Butte  district  favorably  reported  by  the 
Anaconda  Standard.  The  most  significant  lines  in  this1  review 
are  as  follows: 

"Formerly  it  was  believed  that  the  great  copper  veins 
were  confined  to  the  Anaconda  hill.  This  theory  has  been 
exploded  by  development  work  in  the  Pittsmont  property — 
now  a  part  of  East  Butte — which  revealed  rich  copper  tic- 
posits  far  to  the  south  on  the  level  of  the  'flat';  and  by 
equally  promising  veins  to  the  north,  east,  and  in  almost 
every  direction.  Still  with  all  the  new  prospects  opening 
up,  the  old  mines  show  no  indication  of  exhaustion. 

"The  underground  workings  of  the  mines  aggregate  about 
2,000  miles.  The  deepest  shaft  is  3,400  feet.  There  is 
sufficient  ore  blocked  out  to  run  many  of  the  great  mines 
at  their  present  capacity  for  many  years  without  further 
development.  .  .  .  And  when  we  look  ahead  into  the 
millstone  of  the  future  there  is  a  longer  lease  of  life  ap- 
parent for  Butte  than  any  other  district  engaged  in  the 
production  of  copper.  .  .  .  There  is  every  reason  to  be- 
lieve that  there  is  at  least  2,000  feet  of  deeper  mining  below 
the  deepest  shafts  in  the  district  which  remains  to  be  done 
on  a  profitable  basis  in  Butte."  1 

No  less  optimistic  are  the  statements  and  prognostications  made 
in  a  presumably  official  way  by  Mr.  John  H.  Mclntosh,  mining 
editor  of  the  Butte  Miner,  in  the  1914  edition  of  Montana  which 
is  published  by  the  Montana  Department  of  Agriculture  and 
Publicity.  Referring  to  the  A.  C.  M.  Co.,  Mr.  Mclntosh  char- 
acterizes it  as  "a  company  that  has  proved  copper  mining  to  be 
a  business  in  which  the  element  of  chance  is  eliminated  as  far  as 
it  can  possibly  be  done. ' ' 2  And  speaking  of  mining  in  general, 
Mr.  Mclntosh  says : 

"Mining  in  Montana  is  but  an  infant  in  swaddling  clothes. 
A  few  decades  hence  will  find  it  a  mighty  giant  of  an  in- 
dustry and  the  millions  of  dollars  in  ore  already  extracted 
from  her  ground  will  seem  small  in  comparison  with  the 
multiplied  millions  still  remaining  and  which  will  be  mined 
by  the  generations  that  are  yet  to  come."  3 

1  Anaconda  Standard,  January  31,  1916. 

2  Montana,  Department  of  Agriculture  and  Publicity,  1914,  p.  165. 
8  Ibidem,  p.  162. 


112  MINE  TAXATION  IN  MONTANA 

This  statement  may  seem  unduly  inflated  by  the  exaggerated 
exuberance  characteristic  of  all  "publicity"  work.  But  its  sub- 
stance has  been  corroborated  by  one  whose  words  are  as  guarded 
as  they  are  weighty,  and  whose  position  precludes  the  possibility 
of  doubting  either  the  source  of  his  information  or  the  validity 
of  his  conclusions'.  At  a  banquet  given  by  the  Butte  Chamber 
of  Commerce  on  December  8,  1915,  Mr.  John  D.  Ryan,  president 
of  the  Anaconda  Copper  Mining  Company,  made  the  following 
statement : 

"Butte's  industry  is  mining.  We  acknowledge  it  and  we 
are  proud  of  it. 

"Butte  is  the  best  thing  in  this  line  in  the  world.  There 
never  will  be  a  mining  camp  that  will  be  Butte's  equal.  The 
development  of  its  metallurgy  through  men  sitting  around 
the  board  here  tonight  has  made  it  a  leader  in  the  mining 
industry  of  the  world. 

"You  can  never  close  the  mines  of  Butte  in  any  sort  of 
a  market.  You  can  leave  your  property  in  Butte  to  your 
children  with  the  assurance  that  you  have  left  them  a 
goodly  heritage  and  they  will  have  a  good  inheritance."1 

Mr.  Ryan  was  followed  by  several  speakers  at  the  banquet 
who  commended  his  words.  Among  these  speakers  was  one  whose 
remarks  deserve  to  be  quoted  as*  they  offer  such  an  interesting 
opportunity  for  comparison.  The  speaker  referred  to  is  Mr.  C. 
F.  Kelly.  His  remarks  were  in  part  as  follows : 

"I  must  not  close  tonight  without  reference  to  Butte. 
There  is  no  spot  like  it  on  the  map  nor  will  there  ever  be 
another.  Think  of  it— a  hill  that  has  produced  7,000,000,000 
pounds  of  copper,  4,000,000,000  ounces  of  silver  and  enough  in 
the  combined  metals  to  redeem  the  debts  of  all  the  nations 
of  the  earth. 

"We  who  have  heard  Mr.  Ryan's  prophetic  remarks  to- 
night and  who  may  feel  he  is  too  optimistic  will  be  con- 
soled on  this  point  if  we  recall  an  address  he  made  at  a  ban- 
quet at  the  Thornton  hotel  several  years  ago.  His  predic- 
tions then  have  come  true  and  he  tells  you  now  Butte  has 
not  yet  reached  the  zenith  of  her  power  and  richness."  1 

In  reporting  these  speeches,  the  Anaconda  Standard  made  the 
following  editorial  comments: 

"The  notion  has  been  prevalent  in  many  parts  of  the 
1  Anaconda  Standard,  December  9,  1915.   Italics  mine. 


THE  ASSUMPTION  OF  BISK  IN  MINING         113 

country,  and  it  has  been  shared  by  too  many  Butte  people, 
that  Butte  was  an  exceedingly  good  town  for  a  time,  but 
that  it  was  not  permanent,  that  it  could  not  last  because  it 
was  a  mining  town,  and  that  the  only  thing  to  do  was  to 
make  as  much  money  as  possible  and  be  all  ready  to  get 
out  before  the  crash  came.  That  notion  has  been  pretty 
well  dispelled  as  the  years  have  passed.  After  the  assuring 
words  of  Mr.  Ryan  nothing  should  ever  again  be  heard  of 
such  talk."1 

In  view  of  the  corroborating  evidence  presented  in  this  chapter, 
it  is  not  difficult  to  heed  this  injunction. 

1  Anaconda  Standard,  December  10,  1915.     Italics  mine. 


CHAPTER  X. 

THE  ASSESSMENT  AND  TAXATION  OF  MINES. 

The  exhaustibility  of  mineral  resources1  and  the  hazards  of 
mining  do  not  materially  affect  the  problem  of  mine  taxation. 
This  has  long  been  recognized  by  many  students  of  the  subject. 
In  1912,  the  National  Tax  Association  which  is  composed  of 
economists,  lawyers  and  tax  officials,  appointed  a  special  com- 
mittee to  study  the  question  of  mine  taxation.  The  committee 
presented  a  careful  report  at  the  meeting  of  the  Association  in 
1913,  and  laid  down  as  a  basic  proposition  that  "there  is  nothing 
in  the  condition  of  the  mining  industry  which  entitles  it  to 
greater  leniency  of  treatment  than  the  great  mass  of  real  estate 
and  other  property,  subject  to  the  general  property  tax."  x 

Stripped  of  all  irrelevant  issues,  the  problem  of  mine  taxation 
is1  primarily  and  essentially  a  problem  of  valuation  and  assess- 
ment. This  is  inevitable  under  the  system  of  the  general  prop- 
erty tax  under  which  the  attainment  of  equality  and  uniformity 
is  necessarily  dependent  on  the  initial  step  in  the  process  of  tax- 
ation which  is  the  assessment  of  property.  The  whole  super- 
structure rests  upon  the  fundamental  act  of  placing  a  correct 
value  upon  every  kind  and  class  of  property. 

It  is  the  habit  of  many  representatives  of  the  mining  interests 
to  contrast  the  great  difficulties  of  placing  a  value  upon  a  mine 
with  the  ease  of  determining  the  value  of  all  other  property.  The 
pamphlet  on  Mining  Taxation  in  Montana  may  again  be  quoted 
for  a  simple  and  expressive  statement  of  this  point  of  view,  which 
is  summarized  in  the  following  words : 

"Excepting  those  comparatively  few  cases  where  mines 
consist  of  more  superficial  deposits,  easily  measurable 
from  the  surface,  no  human  being  can  place  an  accurate 
value  upon  a  mine.  In  the  case  of  a  farm,  the  acreage,  the 
character  of  the  soil,  the  crop  return,  the  locality  in  which 
it  exists,  the  market  price  of  surrounding  property,  its 
proximity  or  remoteness  to  transportation  facilities,  are  all 
factors  which  are  available,  in  reaching  a  conclusion  as  to 

1  National  Tax  Association,  Proceedings  for  1913,  P-  383. 

114 


ASSESSMENT  AND  TAXATION  OF  MINES         115 

its  value.  In  the  case  of  real  estate,  the  rules  of  meas- 
urable value  are  likewise  easily  ascertainable.  But  who  is 
there  who  knows  or  can  know  the  value  of  a  mine?  .  .  . 
I  challenge  any  man  living  to  place  a  value  upon  the  mines 
of  Butte.  Their  history  has  been  one  of  wonderful  growth. 
All  of  Nature's  known  laws  have  been  violated  in  her  seem- 
ing anxiety  to  store  with  unparalelled  abundance  the  treas- 
ures distributed  in  the  Butte  hill,  but  no  man  can  look 
further  into  the  ground  than  actual  development  warrants, 
or  make  safe  prediction  of  possible  outcome  or  enduring 
life."  ! 

Mr.  Evans,  counsel  for  the  Anaconda  Copper  Mining  Company, 
has  expressed  the  same  thought  in  the  following  words : 

"In  practically  every  instance  it  is  a  physical  impossibility 
to  determine  the  true  cost  value  of  a  mine  such  as  are  found 
in  Montana,  because  the  value  of  that  mine  is  largely  an 
unknown  quantity  until  the  mine  is  exhausted  and  the 
value  reaches  zero."  2 

This  contrast  is  somewhat  misleading.  Though  the  process  of 
assessment  presents  many  gradations  of  difficulty,  according  to 
the  property  involved,  it  cannot  be  said  to  be  "easy"  in  any  case. 
The  assessment  of  rural  and  urban  land  has  been  a  source  of 
endless  difficulties  and  is  still  an  unsolved  problem  in  many 
parts  of  the  country.  True,  in  some  states  the  assessment  of 
realty  has  been  reduced  to  a  series  of  more  or  less  precis'e  pro- 
cesses and  has  thereby  been  made  easier  for  the  tax  official.  But 
the  reason  for  this  simplification  lies  not  only  in  the  nature  of 
the  property,  but  also,  and  to  a  greater  extent,  in  the  careful  and 
systematic  efforts'  which  have  been  applied  for  nearly  a  genera- 
tion to  the  solution  of  this  problem.  Tax  officials,  expert  ap- 
praisers, real  estate  owners,  and  others  have  lent  their  combined 
knowledge  and  experience  to  advance  the  cause  of  scientific  as- 
sessment of  real  estate.  The  greater  ease  and  certainty  of  realty 
assessments  is  the  result  of  these  efforts. 

But  aside  from  real  estate,  there  are  many  classes1  of  property 
the  valuation  of  which  has  been  and  still  is  a  matter  of  great 
difficulty.  It  is  only  necessary  to  mention  public  utilities  to 
suggest  a  problem  which  has  taxed  the  patience  and  mental  re- 

1  C.  F.  Kelly,  Mining  Taxation  in  Montana,  PP.  13-14.    Italics  mine. 

2  L.  O.  Evans,  Butte  Miner,  March  14,  1918. 


116  MINE  TAXATION  IN  MONTANA 

sources  of  tax  officials.  Merchant's1  stock  and  industrial  plants 
are  illustrations  of  difficulties  of  another  kind.  No  assessor  ever 
thought  that  the  valuation  of  business  and  mercantile  corpora- 
tions was  an  easy  job.  But  it  never  occurred  to  any  one  to  de- 
clare that  because  of  thes'e  difficulties  the  assessment  of  such 
property  should  be  made  in  the  easiest  way  possible  without 
regard  to  consequences.  On  the  contrary,  these  difficulties  have 
stimulated  the  closest  study  of  the  problems  involved  and  have 
led  to  the  elaboration  of  new  and  more  accurate  methods. 

It  is  claimed,  however,  that  mines'  are  an  absolute  exception  to 
the  rule  and  that  no  valuation  can  be  placed  upon  a  mine  until 
it  is  exhausted,  that  is,  until  it  is1  too  late  to  collect  taxes  from  it. 
If  this  claim  be  granted,  the  logical  conclusion  would  be  to  give 
up  completely  the  attempt  to  assess  mines  under  the  general 
property  tax.  If  mines  cannot  be  assessed  in  conformity  with 
the  principles  of  the  general  property  tax,  they  should  be  exclud- 
ed from  the  classes  of  property  subject  to  that  tax  and  should 
be  taxed  in  some  other  way. 

There  are  three  possible  methods  of  mine  taxation  which  do 
not  involve  the  necessity  of  placing  a  value  on  the  mining  prop- 
erty. One  is1  a  tonnage  tax ;  the  other  is  a  tax  on  gross  earnings ; 
the  third  is  a  tax  on  capital  stock.  All  three  methods  have  been 
tried  at  one  time  or  another  in  one  or  more  states.  A  tonnage 
tax  was  levied  in  Michigan  from  1853  to  1891,  and  in  Minnesota 
from  1881  to  1897.  The  law  in  Michigan  at  first  imposed  a  tax 
of  one  dollar  for  each  ton  of  copper  obtained,  ten  cents  for  each 
ton  of  iron  ore,  and  one-half  cent  for  each  ton  of  coal.  The  rates 
were  revised  several  times  and  were  finally  fixed  in  1872  at 
seventy-five  cents  a  ton  on  copper  smelted  in  the  state  and  one 
dollar  if  smelted  outside,  one  cent  on  iron  ore,  and  one-half  cent 
on  a  ton  of  coal.1  These  taxes  were  paid  by  the  mines  for  state 
purposes  only.  In  Minnesota  the  law  imposed  a  tax  of  fifty 
cents  on  each  ton  of  copper,  one  cent  on  each  ton  of  iron  ore 
mined  and  shipped  and  disposed  of,  "one-half  of  such  payments 
to  be  credited  to  the  general  fund  of  the  state  and  the  other  half 
to  be  credited  to  the  county  or  counties  in  which  such  mines  were 
located. " 2  In  1896  the  tonnage  law  was  declared  unconstitu- 

1  Lewis  E.  Young,  Mine  Taxation  in  the  United  States,  p.  52. 

2  Ibidem,  p.  54. 


ASSESSMENT  AND  TAXATION  OF  MINES         117 

tional  in  Minnesota.    The  courts  of  Pennsylvania  and  Maryland 
have  also  held  that  such  specific  taxes  are  unconstitutional. 

The  demand  for  the  reintroduction  of  a  tonnage  tax  in  these 
states  has  been  made  several  times.  The  Minnesota  Tax  Com- 
mission in  1902  and  again  in  1908  recommended  such  a  tax  '  *  as 
the  only  appropriate  means  for  the  taxation  of  the  output  of 
mines. ' ' 1  In  Michigan  there  was  a  continuous  demand  for  the 
enactment  of  a  tonnage  tax  law  which  in  1914  culminated  in  a 
movement  to  force  legislative  action  through  the  initiative.  In 
both  states  the  demand  died  out  for  a  while,  but  it  has  been 
recently  revived  by  the  Non-Partisan  League  which  came  into 
existence  in  1916.  One  of  the  points  in  the  "pledge"  which 
members'  of  the  League  are  expected  to  make,  contains  the  de- 
mand for  ' '  a  tonnage  tax  on  ore  production. ' ' 

The  tonnage  tax  has  the  advantage  of  simplicity,  of  being 
easily  collectible,  and  of  falling  only  on  mines  and  mineral  lands 
which  are  productive.  It  is  also  believed  that  such  a  tax  would 
secure  a  large  share  of  the  mining  profits  to  the  state.  That 
of  course  would  depend  upon  the  rate  imposed.  This  may  be 
illustrated  by  the  situation  in  Montana  in  1916.  According  to 
the  Senate  Tax  Investigation  Committee,  the  mining  property 
of  the  state  in  1916  paid  $1,325,792  in  taxes.  The  United  States 
Geological  Survey  reports  the  total  number  of  short  tons  of  ore 
mined  in  Montana  in  1915  (which  would  serve  as  the  basis  of  as- 
sessment in  1916)  as  6,129,924.  This  means  that  in  order  to 
receive  the  same  amount  of  taxes,  it  would  have  been  necessary 
to  impose  a  tax  of  21.6  cents'  on  each  ton  of  ore.  If  the  rate  used 
in  Michigan  and  Minnesota  of  50  and  75  cents  a  ton  had 
been  imposed,  the  taxes  received  by  the  state  would  have 
been  twice  and  three  times  as  great  respectively.  A  tax  of  50 
cents'  per  ton  would  probably  not  be  considered  excessive. 

However,  the  tonnage  tax  has  also  some  disadvantages.  It  does 
not  affect  non-producing  mines  and  mineral  lands.  It  is  un- 
certain, and  the  public  revenue  derived  from  it  would  fluctuate 
with  the  variations  in  production  from  year  to  year.  The  re- 
ports of  the  Geological  Survey  show  that  in  Montana  the  pro- 
duction of  minerals  has  varied  considerably  at  times.  It  was,  for 

1  Ibidem,  P.  54. 


118  MINE  TAXATION  IN  MONTANA 

instance,  5,960,118  tons  in  1913,  and  5,128,956  in  1914 ;  a  varia- 
tion of  831,162  short  tons'  or  14  per  cent.  Another  objection  is 
that  the  volume  of  output  is  not  a  measure  of  ability  to  pay 
because  it  disregards  the  costs  of  mining.  Two  mines  having 
the  same  gross  output  per  year  may  show  different  profits  as  a 
result  of  different  percentages  of  metal  in  the  ore,  different 
costs  of  treatment,  etc.  The  burden  of  taxation  under  such 
conditions  would  be  heavier  on  the  less  profitable  mines,  and  in 
order  to  equalize  the  tax  it  would  be  necessary  to  adopt  the  prin- 
ciple of  graduation.  But  to  graduate  the  rate  would  mean  to 
determine  the  profit,  and  that  would  involve  the  necessity  of  ap- 
praising the  property.  In  other  words,  a  graduated  tonnage 
tax  destroys  the  simplicity  and  definiteness  of  the  method.  A 
non-graduated  tonnage  tax  results  in  inequalities  between  differ- 
ent mines.  The  latter  objection  would  probably  have  less  force  in 
Montana  as  applied  to  the  Anaconda  Copper  Mining  Company. 
Whatever  inequalities  would  result  between  the  mines  of  the 
Company  from  a  non-graduated  tonnage  tax  would  be  neutralized 
because  the  more  profitable  as  well  as  the  less  profitable  mines 
are  under  the  same  ownership. 

Another  method  of  taxation  which  does  not  require  the  valu- 
ation of  mining  property  is  an  "output  tax"  or  more  properly  a 
tax  on  gross1  earnings.  Such  a  tax  may  be  levied  in  several  ways. 
The  state  may  decide  that  the  total  amount  of  taxes  in  the  state 
should  be  apportioned  among  the  various  industries.  For  in- 
stance, it  might  be  decided  that  the  mining  industry  in  Montana 
should  bear  one-third  or  one-fourth  of  all  taxes.  Knowing  the 
total  amount  of  taxes  to  be  levied,  the  proportion  to  be  paid  by 
the  mines,  and  the  total  gross  earnings  of  the  mines  for  the  year, 
the  rate  can  be  easily  ascertained.  This  procedure  implies  a 
basis  for  apportioning  the  tax  among  the  industries.  "Gross 
earnings"  or  capital  invested  might  serve  as  a  basis,  but  in  either 
case  the  objection  could  be  raised  that  there  is  no  necessary  rela- 
tion between  such  basis  of  apportionment  and  ability  to  pay.  To 
apportion  the  taxes  in  accordance  with  net  income,  on  the  other 
hand,  would  raise  again  the  question  of  placing  a  value  on  the 
mines. 

An  easier  and  more  practicable  way  of  using  a  tax  on  gross 
earnings'  consists  in  placing  an  arbitrary  rate  at  a  specified  per- 


ASSESSMENT  AND  TAXATION  OF  MINES         119 

centage  of  the  gross  value  of  the  output.  This  method  of  taxation 
has  been  extensively  used  in  Canada  and  only  in  a  limited  degree 
in  this  country.  Wisconsin,  for  instance,  assesses  producing  lead 
and  zinc  mines'  at  one-fifth  of  the  gross  proceeds  of  the  preceding 
year.  The  people  of  Montana  are  familiar  with  the  tax  in  the 
form  in  which  it  is  applied  to  common  carriers  and  express  com- 
panies. Prior  to  1917  the  Montana  law  required  such  corpora- 
tions to  procure  a  state  license  for  which  they  paid  in  proportion 
to  gross  earnings.  The  tax  was  graduated,  being  $5  per  quarter 
for  corporations  doing  business  in  an  amount  less  than  $5,000, 
and  $225  per  quarter  for  those  whose  quarterly  business  was 
$75,000  or  over.  In  1917  a  new  law  was  passed  imposing  a  tax 
of  5  per  cent  on  the  gross  proceeds'  of  all  private  car  com- 
panies doing  business  in  the  state.  A  similar  tax  might  be  im- 
posed upon  mines.  To  cite  again  the  situation  in  1916,  the 
Geological  Survey  reports  that  the  mining  industry  in  1915  (the 
basis  for  assessing  the  tax  in  1916)  had  a  total  gross  value  of 
$89,147,138.  To  collect  $1,325,792  in  taxes  (the  actual  amount 
paid  by  the  mining  industry  in  that  year)  would  have  necessi- 
tated a  rate  of  about  $15  per  $1,000,  or  about  1.5  per  cent 
if  the  rate  were  uniform.  A  rate  of  5  per  cent,  such  as  is 
imposed  on  private  car  companies,  would  have  produced  $4,457,- 
000  in  taxes  in  1916  and  considerably  more  in  1917. 

The  advantages  of  the  tax  on  gross  earnings  are  approximately 
the  same  as  those  of  the  tonnage  tax.  It  can  be  easily  determined 
and  administered;  it  absolves  the  tax  officials  from  concerning 
themselves  with  the  character  of  the  mine,  its  value,  probable 
life,  net  income,  etc. ;  it  is  economical,  as  it  involves  no  appraisal 
of  the  mines;  it  leaves  little  room  for  tax-dodging  as  the  gross 
earnings  are  less  difficult  to  determine.  The  disadvantages  of 
this  method  of  taxation  are  the  same  as  those  which  were  found 
in  the  case  of  the  tonnage  tax. 

The  tax  on  gross  earnings  has  had  a  number  of  advocates  in 
recent  years,  among  them  Mr.  Emmet  D.  Boyle,  Governor  of 
Nevada  and  a.  mining  engineer.  Governor  Boyle  prefers  this 
method  of  mine  taxation  to  all  others',  because  it  is  simple  and 
sure  to  produce  a  larger  public  revenue  than  is  now  obtained  from 
the  mines.1  On  the  other  hand,  the  tax  on  gross  earnings  has 

1  E.  D.  Boyle,  "Mine  Taxation,"  National  Tax  Association,  1915,  PP. 
92-3. 


120  MINE  TAXATION  IN  MONTANA 

been  vigorously  opposed  by  others.  The  Committee  on  Mine 
Taxation  appointed  by  the  National  Tax  Association  criticised 
this  tax  in  the  following  words : 

"Gross  income  bears  no  uniform  relation  either  to  net 
Income  or  to  value.  A  mine  with  a  gross  income  in  any 
year  of  $100.000  may  have  lost  money  and  have  no  more 
ore  to  mine,  or  it  may  have  made  $50,000  and  have  thirty 
such  years  to  look  forward  to  in  the  future,  or  it  may  have 
made  $10,000  net  and  have  five  years  of  similar  business 
to  look  forward  to  in  the  future.  With  mines  of  very  short 
life  the  gross  income  method  tends  to  make  the  tax  exces- 
sive. With  mines  of  long  life  and  relatively  low  cost  of 
production,  the  method  tends  to  yield  an  insufficient  tax. 
As  between  mines,  it  is  almost  always  unjust  and  un- 
equal." 1 

This  view  was  endorsed  by  the  American  Mining  Congress  at 
its  annual  conference  in  1914. 

A  third  method  of  mine  taxation  which  does  not  necessitate 
an  appraisal  of  the  property  is  that  of  taxing  the  mines  either 
on  their  capital  stock  or  on  their  stock  and  bonded  indebtedness 
combined.  The  * 'stock  and  bond"  method  has  been  and  is  ap- 
plied to  one  or  more  classes  of  corporations  in  a  number  of 
states.  California,  for  instance,  has  used  this  method  in  assess- 
ing its'  public  utilities.  The  method  consists  in  multiplying  the 
total  number  of  outstanding  shares  of  stock  and  bonds  by  the 
average  market  value  of  the  securities.  The  market  value  of  the 
securities  is  obtained  by  finding  the  average  quotations  for  a 
definite  period  of  time.  The  California  Tax  Commission,  for 
instance,  used  the  market  prices  for  the  fifteen  months  from 
January  1,  1915,  to  March  31,  1916.2  As  few  mining  companies 
have  a  funded  debt,  the  method,  as  applied  to  mining,  would 
really  mean  placing  a  value  on  the  mines  equal  to  their  capital 
stock  during  the  year  or  other  period.  The  method  may  be  il- 
lustrated by  the  experience  of  Michigan  where  it  has  been  used 
to  appraise  the  copper  mines.  The  valuation  for  1916  was  based 
upon  the  average  stock  quotation  throughout  the  year.  The 
closing  bid  price  every  Monday  was  used  in  determining  the 
average  for  the  year  ending  the  second  Tuesday  in  April,  1916. 
The  mines  were  not  assessed  for  the  full  value  of  the  stock,  but  at 

1  National  Tax-  Association,  1913,  pp.  389-390. 

2  Report  of  California  State  Tax  Commission,  1917,  PP-  23-5. 


ASSESSMENT  AND  TAXATION  OF  MINES         121 

a  certain  percentage:  producing  dividend  paying  mines 
were  appraised  at  66  per  cent  of  the  average  quotation ;  produc- 
ing non-dividend  paying  mines  at  55  per  cent;  and  the  non- 
producing  properties  at  44  per  cent.  The  total  assessment  of  the 
copper  mines  of  the  state  in  1916  was1  $80,000,000.1 

The  chief  objection  to  this  method  is  the  fact  that  it  results  in 
a  valuation  which  includes  elements'  not  usually  reached  other- 
wise, such  as  speculative  values,  good  will,  special  processes  and 
patents,  etc.  Besides,  the  number  of  shares  bought  and  sold  in 
any  one  day  throughout  a  definite  period  may  be  comparatively 
small  and  may  ris'e  and  fall  in  value  as  a  result  of  purely  local 
conditions  or  artificial  stimulation.  In  either  case,  an  assessment 
based  on  such  market  quotations  would  not  reflect  taxable  value. 
The  Michigan  Tax  Commission  evidently  wished  to  eliminate 
these  disturbing  influences  by  taxing  only  a  percentage  of  the 
market  value.  In  Montana  the  problem  would  be  somewhat 
complicated  by  the  fact  that  the  quotations  of  the  A.  C.  M.  Co. 
undoubtedly  reflect  the  value  of  its  subsidiary  departments  and 
of  its  properties  outside  the  state.  These  considerations  prompt- 
ed the  Committee  on  Mine  Taxation  of  the  National  Tax  Associa- 
tion to  oppose  this  form  of  taxation.  To  quote  from  the  report 
of  the  committee : 

"We  are  opposed  to  a  tax  based  upon  the  market  value  of 
capital  stock,  because  it  lends  itself  so  readily  to  wild  cat 
schemes  and  because  where  the  value  of  the  capital  stock 
has  any  solid  basis  or  real  meaning  it  rests  upon  explora- 
tion or  development  data  and  geological  inference  which 
can  be  used  just  as  intelligently  by  expert  appraisers  as 
by  the  stock  buying  public."  2 

It  cannot  be  denied,  however,  that  the  method  has  the  great 
advantage  of  simplicity  and  certainty. 

The  three  methods  discussed  above  have  the  common  advan- 
tage of  being  easily  administered;  yet  for  one  reason  or  another 
they  have  been  discarded  where  tried.  Today  they  are  used  but 
in  a  few  states  in  this  country  and  only  in  modified  form.  The 
method  which  is  most  extensively  used  is  that  of  the  general 
property  tax.  It  is1  estimated  that  the  states  which  tax  mines 

1  L.  E.  Young,   Mine  Taxation  in  the  United  States,  P-  192. 

2  National  Tax  Association,  1913,  P-  390. 


122  MINE  TAXATION  IN  MONTANA 

under  the  general  property  tax  produce  over  80  per  cent  of  the 
total  mineral  output  of  the  country.1 

The  extensive  application  of  the  general  property  tax  to  mines 
is  significant  in  view  of  the  claim  quoted  above  that  a  correct 
valuation  of  a  mine  is  an  impossibility.  Tax  authorities  have 
not  denied  the  great  and  special  difficulties  involved  in  apprais- 
ing mines.  But  the  general  feeling  that  the  mining  industry  was 
otherwise  escaping  its  just  burden  of  taxation  prompted  the  leg- 
islatures of  the  various  states  to  make  a  decided  effort  to  solve 
the  problem.  Minnesota  in  1907  and  Michigan  in  1911  led  the 
movement  for  a  proper  physical  valuation  of  mining  properties. 
The  Michigan  State  Tax  Commission  invited  Mr.  J.  R.  Finlay, 
one  of  the  most  distinguished  mining  engineers1  in  the  country, 
to  appraise  the  iron,  copper  and  other  mines  of  the  state.  The 
procedure  followed  in  Michigan  attracted  much  attention,  and 
the  ad  valorem  method  of  mine  valuation  has  since  been  the  sub- 
ject of  incessant  and  animated  discussion. 

The  ad  valorem  method  is  based  on  the  assumption  that  a  mine 
has  a  determinable  value  which  depends  upon  a  certain  number 
of  factors.  In  appraising  the  Michigan  copper  mines,  Mr.  Fin- 
lay  used  five  factors: 

1.  The  average  cost  of  securing  the  products  of  a  mine. 

2.  The  average  price  at  which  these  products  can  be  sold. 

3.  The  rate  of  production  of  the  mine. 

4.  The  time  for  which  that  output  can  be  maintained. 

5.  The  rates  of  interest  to  be  allowed. 

Mr.  Finlay  estimated  average  costs  of  production  and  average 
prices  from  the  past  experience  of  the  mines  and  from  the  gen- 
eral trend  of  metal  prices.  On  such  basis  it  was  simple  to  de- 
termine the  average  net  profits.  Given  these  factors  and  the 
probable  life  of  the  mine,  the  valuation  is  but  a  simple  problem 
in  the  mathematics  of  investment.  Says  Mr.  Finlay : 

"The  life  of  the  mine  is  based  partly  on  developed  ore 
and  partly  upon  an  assumption  of  continuance  of  known 
ore  bodies  beyond  the  present  bottom  levels  of  the  mines. 
The  assumption  of  continuance  is  based  mainly  upon  the 
extent  to  which  the  continuity  of  the  deposits  has  been 
proved  for  the  district  and  for  the  type  to  which  the  mine 

1  L.  E.  Young,  op.  cit.,  P.  123. 


ASSESSMENT  AND  TAXATION  OF  MINES         123 

belongs.  The  future  value  of  a  series  of  dividends  is  re- 
duced to  a  present  value  by  the  annuity  method ;  that  is,  a 
sum  is  calculated  upon  which  the  series  of  dividends  shall 
pay  5  per  cent  interest  and  also  provide  each  year  a  sinking 
fund  installment  which,  invested  each  year  at  4  per  cent 
interest,  and  added  to  prior  installments  similarly  invested 
and  reinvested,  will  equal  the  sum  taken.  This  sum  is  the 
amount  which  an  investor  can  afford  to  pay  for  the  prop- 
erty." i 

Mr.  Finlay's  procedure  has  been  criticized  by  some  as  utterly 
fallacious.  It  has  been  contended  that  "estimates  of  further 
extensions"  of  ore  and  of  "the  average  content  of  valuable 
minerals"  are  nothing  but  guesses  in  most  cases;  that  the  factor 
of  average  price  to  be  obtained  for  the  product  is  a  ' '  presumption 
and  nothing  else";  and  that  the  other  three  factors  are  estimates 
subject  to  many  errors,  and  that  in  view  of  the  presumptive  char- 
acter of  the  data,  not  even  "the  most  ardent  advocate  of  mine 
taxation  on  a  valuation  basis"  can  "contend  that  an  equitable 
distribution  of  tax  burdens  can  be  accomplished  by  this  meth- 
od."  Though  this  criticism  claims  that  errors  are  possible  in 
all  five  factors,  it  derives  its  chief  strength  from  the  feeling  that, 
in  the  words  of  a  well  known  student  of  taxation,  "any  esti- 
mates of  the  value  of  the  minerals  in  the  ground  must  contain 
a  large  element  of  guesswork — diligent  and  scientific  guesswork 
it  may  be,  but  guesswork  still."  3 

Others  have  recognized  that  the  above  criticism  is  too  sweeping 
in  character  and  have  based  their  objections  to  the  ad  valorem 
method  upon  a  more  detailed  analysis.  Governor  E.  M.  Boyle, 
in  his  address  to  the  National  Tax  Association  in  1915,  made  clear 
that  the  crux  of  the  problem  is  the  determination  of  the  con- 
tinuity in  metal  contents  and  in  volume  through  the  estimated 
area.  Following  Mr.  Hoover,  Governor  Boyle  divides  all  ore  de- 
posits from  this1  point  of  view  into  four  types : 

1.  Deposits  of  the  infiltration  type  in  porous  beds,  such  as 
Lake  Superior  copper  conglomerates  and  African  gold  bankets. 

1  J.  R.  Finlay,  "Appraisal  of  Michigan  Mines,"  Engineering  and  Mining 
Journal,  September  9,  1911. 

2  Heath  Steele,  "Mine  Taxation,"  The  Engineering  and  Mining  Journal, 
August  29,  1914. 

3  O.  Skelton,  National  Tax  Association,  1908,  p.  392. 


124  MINE  TAXATION  IN  MONTANA 

2.  Deposits  of  the  fissure  vein  type,  such  as  California  quartz 
veins'. 

3.  Replacement  or  impregnation  deposits  on  the  lines  of  fis- 
suring  or  otherwise. 

4.  Deposits  consisting  of  huge  masses  of  ore  such  as  the  "im- 
pregnated copper  porphyries"  of  Utah,  Nevada  and  Arizona,  and 
the  iron  ore  deposits  of  Michigan  and  Minnesota. 

Governor  Boyle  further  quotes  Hoover  to  the  effect  that  ''the 
uniformity  of  conditions  of  deposition  in  the  first  class  has  re- 
sulted in  the  most  satisfactory  continuity  of  ore  and  of  its  metal 
contents";  that  in  the  second  class,  "there  is  laterally  and  ver- 
tically a  reasonable  basis  for  expectation  of  continuity  but 
through  much  less  distance  than  in  the  first  class ' ' ;  but  that ' '  the 
third  class  of  deposits'  exhibits  widely  different  phenomena  as 
to  continuity, ' '  and  no  generalization  is,  therefore,  of  any  value. 
On  the  basis  of  this  analysis,  Governor  Boyle  concludes  that  a 
"mining  engineer  could  with  such  data  as  ought  to  be  available 
in  a  well  conducted  mine  office  make  a  fairly  accurate  appraise- 
ment of  those  properties  coming  under  the  first  and  fourth 
classes,  could  make  an  approximation  of  the  value  of  the  prop- 
erties' under  the  second  class,  and  could  "guess"  at  the  values 
of  the  properties  in  the  third  class.1  This1  criticism  of  the  ad 
valorem  method  has  also  been  presented  by  a  number  of  tax 
officials.2 

It  is1  generally  known  that  the  great  majority  of  mines  in 
Montana,  as  well  as  in  some  other  western  states,  belong  in  the 
third  class.  In  most  of  these  mines,  the  *  *  ore  in  sight ' '  is  said  to 
equal  approximately  two  or  three  years'  supply.  It  is  claimed 
that  it  is  unpracticable  to  carry  development  further  than  that 
because  it  would  be  impossible  to  keep  the  workings  open.3  A 
valuation  based  upon  "the  ore  in  sight"  would  be  purely  nom- 
inal. On  the  other  hand,  the  irregularity  in  form  and  uncer- 
tainty in  tenor  of  the  Montana  ore  deposits  would,  it  is  be- 
lieved, make  any  estimate  of  probable  or  possible  ore  a  mere  guess1. 
Honest  differences  of  opinion  might  lead  to  "vexatious  contro- 
versies" and  litigation  too  costly  to  be  tolerated.  It  is  therefore 

1  E.  D.  Boyle,  "Mine  Taxation,"  National  Tax  Association,  1915,  P.  87. 

2  P.  J.  Miller,  Arizona  Tax  Commission,  Report  for  1914,  PP.  56-62. 

3  L.  O.  Evans,  Butte  Miner,  March  14,  1918. 


ASSESSMENT  AND  TAX  A  TION  OF  MINES         125 

asserted  that  though  the  ad  valorem  method  may  be  practicable 
in  those  states  where  the  character  of  the  ore  deposits  permits 
it,  it  is  absolutely  inapplicable  in  Montana. 

In  addition  to  this  main  criticism,  the  opponents  of  the  ad 
valorem  method  maintain  that  its  adoption  would  necessitate 
frequent  appraisals  which  would  require  the  services  of  tech- 
nically trained  men;  that  in  the  case  of  s'ome  properties  the 
expense  might  be  out  of  proportion  to  the  revenue  derived ;  that 
it  would  hinder  development  in  the  case  of  new  properties  and 
would  encourage  the  rapid  exploitation  of  ore-bodies  whose  ex- 
istence had  been  proved.  These  critics  admit,  however,  that  the 
ad  valorem  method  "if  scientifically  applied  would  exactly 
equalize  the  mining  assessments  with  the  assessment  of  all  other 
property  to  which  the  same  method  of  valuation  and  the  same  tax 
rate  were  applied. "  *  In  other  words,  they  admit  that  under  the 
general  property  tax  the  ad  valorem  method  of  mine  valuation 
is  logically  the  one  which  is  most  likely  to  bring  about  equality 
as  between  mining  and  other  property. 

It  is  exactly  this  admission  which  the  advocates  of  the  ad 
valorem  method  take  as1  their  starting  point.  In  their  opinion, 
a  method  which  promises  to  equalize  the  tax  burden  between 
mining  and  other  property  is  not  to  be  lightly  discarded,  though 
it  may  seem  to  present  insuperable  difficulties.  They  insist  upon 
the  fact  that,  all  uncertainties  notwithstanding,  mining  companies' 
have  placed  in  the  past  and  will  continue  in  the  future  to  place  a 
value  upon  their  properties,  and  that  in  doing  so  they  use  all  avail- 
able data  to  arrive  at  a  correct  estimate  and  apply  definite  meth- 
ods of  calculation  to  reduce  the  margin  of  error.  An  examination 
of  the  balance  sheet  of  any  well  conducted  company  shows  the 
amount  at  which  the  physical  property  is  carried.  As  shown  in 
Chapter  VI  the  balance  sheet  of  the  A.  C.  M.  Co.  for  1917  car- 
ries "mines'  and  mining  claims,  coal  mines,  water  rights,  and 
lands  for  reduction  works  and  refineries,  etc.,"  at  $74,704,518, 
and  "buildings,  and  machinery  at  mines,  reduction  works,  re- 
fineries, etc.,"  at  $51,881,399.  The  same  or  similar  items  may 
be  found  carried  at  definite  values  on  the  balance  sheets  of  the 
other  mining  companies  of  this  and  other  states'.  These  valua- 

1  E.  D.  Boyle,  National  Tax  Association,  19/5,  p.  81. 


126  MINE  TAXATION  IN  MONTANA 

tions  are  arrived  at  in  very  definite  ways.  There  may  be  a 
greater  or  smaller  speculative  element  in  the  value  fixed,  and 
some  uncertainty  will  always  remain  in  such  a  valuation.  But 
a  degree  of  uncertainty  cannot  be  avoided  in  the  assessment  of 
any  form  of  property,  and  the  best  assessment  is  never  more  than 
as  close  an  approximation  to  true  value  as  the  nature  of  the 
property  will  permit. 

The  cas'e  of  the  advocates  of  the  ad  valorem  method  may  be 
best  presented  by  quoting  from  the  report  of  the  Committee  on 
the  Taxation  of  Mines  to  the  National  Tax  Association  in  1913. 
This  committee  was  composed  of  six  members'  including  Mr. 
C.  M.  Zander,  chairman  of  the  Arizona  Tax  Commission,  C.  P. 
Link,  a  member  of  the  Colorado  Tax  Commission,  and  C.  K. 
Leith,  professor  of  geology  at  the  University  of  Wisconsin.  The 
committee  declares  emphatically  that  mines  should  be  taxed  "on 
the  same  basis  as  other  property."  The  report  then  proceeds: 
"In  such  valuation  there  will  necessarily  be  an  element  of  un- 
certainty. This  exists  in  the  valuation  of  all  property,  particu- 
larly land  and  natural  resources  which  have  no  'reproduction' 
or  'reduplication'  value.  This  uncertainty  indeed  characterizes 
all  ad  valorem  taxation,"  but  this  can  be  overcome  by 

"a  set  of  conscientious  officials  endowed  with  impartiality 
and  industry,  assisted  by  the  necessary  expert  aid  and  fur- 
nished with  all  the  data  and  information  procurable  re- 
garding the  properties  they  are  called  upon  to  assess.  With 
these  conditions  satisfied,  the  element  of  uncertainty  will 
be  cared  for  by  the  exercise  of  reasonable  judgment,  as 
satisfactorily  as  the  same  element  is  taken  care  of  in  the 
assessment  of  city  lots  or  public  utilities." 

The  committee  emphasizes  the  necessity  of  obtaining  full  and 
correct  data. 

"In  valuing  mines  of  this  class  (i.  e.,  producing  mines) 
it  is  particularly  important  that  assessing  officers  and 
their  experts  should  have  free  access  to  all  the  information 
and  data  in  the  possession  of  the  owners  and  operating 
companies,  and  that  such  information  should  be  supple- 
mented and  strengthened  by  the  right,  freely  exercised  and 
used  .  .  .  ,  of  examining  the  property  and  making  their 
own  estimates  of  mineral  content,  quality  of  ore,  and  all 
other  physical  conditions  involved  in  the  appraisal.  The 


ASSESSMENT  AND  TAXATION  OF  MINES         127 

policy  of  secrecy,  of  withholding  information,  of  shrouding 
the  conditions  which  affect  value  in  mystery  has  outlived 
its  usefulness  in  the  present  state  of  American  taxation. 
In  Michigan,  Wisconsin,  Minnesota  and  other  advanced 
states  such  information  is  freely  given  and  has  not  been 
abused." 

The  committee  summarizes  its  reasons1  for  opposing  other  meth- 
ods of  taxation  and  then  concludes  as  follows : 

"In  conclusion,  your  committee  believes  that  the  general 
method  now  used  with  variations  in  Michigan,  Wisconsin, 
and  Minnesota  is,  when  carefully  applied,  on  the  whole  the 
most  satisfactory  method  of  mine  taxation  now  enforced  in 
the  United  States.  This  method  requires  a  measurement  or 
computation :  ( a )  of  the  ore  in  the  mine,  considering  among 
other  things  the  ore  blocked  out,  the  ore  explored  and  the 
ore  estimated  to  exist  through  geological  inference  and  de- 
duction, such  inferences  to  be  based  on  the  history  of  the 
mine  in  question,  the  history  of  the  district  in  which  it  is 
located,  and  the  history  of  similar  geological  formations 
elsewhere;  (b)  the  average  annual  production  or  shipment 
based  upon  the  past  history  of  the  mine — or — where  a  mine 

of  known  value  is  withheld  from  production 

upon  the  history  of  similarly  circumstanced  mines  and  upon 
expert  mining  judgment;  (c)  the  probable  life  of  the  mine, 
secured  by  dividing  (a)  by  (b)  ;  (d)  the  average  net  profit 
per  ton  secured  by  deducting  from  the  average  price  per  ton 
the  corresponding  or  offsetting  expenses.  This  profit  per 
ton  multiplied  by  the  average  production  or  shipment  yields 
the  average  net  profit  per  year;  (e)  the  value  of  the  mine; 
i.  e.,  the  present  worth  of  the  annual  profit  or  dividend 
throughout  the  future  life  of  the  mine,  using  an  interest 
rate  or  basis  which  mining  experience  shows  necessary  to 
induce  capital  to  invest  in  the  mining  industry  at  the  place 
where  the  property  is  situated.  In  valuations  made  by  this 
method  it  is  essential  that  allowance  should  be  made  for  an 
amortization  fund  when  an  equivalent  allowance  is  not 
made  through  depreciation  or  exhaustion  accounts  which 
invested  say  at  four  per  cent  will  provide  for  the  return 
within  reasonable  time  of  the  entire  capital,  not  including 
the  capital,  if  any,  used  in  purchasing  the  mine  or  the  min- 
eral itself.  Whenever  new  ore  reserves  are  discovered,  or 
a  greater  annual  extraction  takes  place  than  that  calculated, 
or  any  other  factor  changes  and  disturbs  the  calculation, 
a  new  appraisal  should  be  made. 

"In  short,  your  committee  recommemnds  the  application 


128  MINE  TAXATION  IN  MONTANA 

of  the  property  tax  to  this  class  of  mines,  the  assessment 
to  be  made  in  general  accordance  with  the  methods  used 
in  Michigan,  Wisconsin,  and  Minnesota,  supplemented  by 
expert  judgment  and  all  the  relevant  information  that  can 
be  secured.  The  most  potent  and  convincing  reason  for  this 
conclusion  is  found  in  the  fact  that  it  is  this  method  which 
is  used  by  properly  qualified  investors  in  the  mining  indus- 
try where  so  far  as  possible,  speculation  and  the  gambling 
element  have  been  eliminated."  l 

Since  the  above  report  was  published,  the  ad  valorem  method 
of  mine  taxation  has  become  more  practicable  as  a  result  of  fed- 
eral tax  legislation.  As  was  pointed  out  in  a  preceding  chapter, 
the  Federal  Income  Tax  law  of  1916,  as  amended  October  3,  1917, 
provided  for  certain  deductions  from  taxable  net  income  which 
in  the  case  of  mines  included  an  allowance  for  depletion.  Every 
mining  company  is1  permitted  by  the  law  and  the  regulations  of 
the  Treasury  Department  to  extinguish  the  total  amount  of  its 
invested  capital  which  means  either  the  ' t  fair  market  value  as  of 
March  1,  1913, ' '  or  the  actual  cost  in  case  the  mine  was  acquired 
subsequent  to  that  date.  In  fixing  the  fair  market  value  of  a 
mine  the  Treasury  Department  prohibits  speculative  valuations 
and  requires  that  the  value  ' '  must  be  determined  upon  the  basis' 
of  the  salable  value  en  bloc  as  of  that  date  of  the  entire  deposit 
of  minerals  contained  in  the  property  owned,  exclusive  of  the 
improvements  and  development  work ;  that  is,  the  price  at  which 
the  natural  deposit,  or  mineral  property  as  an  entirety  in  its 
then  condition  could  have  been  disposed  of  for  cash  or  its'  equiva- 
lent." But  the  most  significant  provision  which  bears  most 
directly  on  the  subject  of  the  chapter  is  contained  in  the  follow- 
ing words : 

"In  cases  wherein  the  quantity  of  the  mineral  deposit 
in  the  mines  prior  to  March  1,  1913,  can  not  be  estimated 
with  any  degree  of  accuracy,  it  will  be  necessary,  if  deple- 
tion deductions  are  to  be  taken,  for  the  individual  or  cor- 
poration owning  the  deposits,  with  the  best  information 
available,  to  arrive  at  the  fair  market  value  of  the  prop- 
erty as  of  March  1,  1913 "  2 

1  National  Tax  Association,  1913,  pp.  388-392.     Italics  mine. 

2  Italics  mine. 


ASSESSMENT  AND  TAXATION  OF  MINES         129 

This  ruling  of  the  Treasury  Department  completely  ignores 
the  elaborate  arguments  about  the  impossibility  of  placing  a 
value  on  a  mine  until  it  is  exhausted.  It  simply  requires  that 
such  a  valuation  be  made,  and  that  where  exact  calculations  are 
impossible,  the  valuation  be  based  on  "the  best  information  avail- 
able/' 

The  most  interesting  thing  in  the  situation  is  the  reception  ac- 
corded to  the  federal  tax  law  by  the  representatives  of  the  mining 
industry.  There  were  some  strenuous  objections  to  the  method 
of  computing  excess  profits  laid  down  by  the  law.  A  resolution 
was  als'o  sent  to  the  Secretary  of  the  Treasury  by  representatives 
of  a  number  of  mines  in  the  stage  of  development  requesting  that 
the  law  be  amended  in  such  a  manner  as  to  make  a  distinction 
between  ' '  producing  mines ' '  and  ' '  development  mines. ' ' *  But 
with  these  and  a  few  other  minor  criticisms,  the  chief  provisions 
of  the  law  were  received  with  satisfaction.  A  special  committee, 
appointed  by  the  New  York  Section  of  the  American  Institute  of 
Mining  Engineers  and  composed  of  Mr.  J.  Parke  Channing,  Mr. 
C.  F.  Kelley,  and  Mr.  John  V.  N.  Dorr,  prepared  a  careful  and 
favorable  report  on  the  law.  The  committee  characterized  the 
provisions  of  the  law  concerning  depletion  as  follows: 

"clear,  explicit,  and  ....  as  fair  and  equitable  as  any 
legislative  provision  which  could  be  adopted,  particularly 
in  its  application  to  mining  property  acquired  prior  to 
March  1,  1913."  2 

In  the  words  of  the  committee, 

"the  provision  of  the  statute  that  'a  reasonable  allowance 
shall  be  made  for  depletion'  is  all  that  the  mine  owners 
should  ask,  and  is  as  much  as  the  government  should  al- 
low." 2 

But  the  most  significant  part  of  this  report  is  that  which  deals 
with  the  question  of  valuation.  This  part  of  the  report  deserves 
to  be  quoted  at  greater  length.  Says  the  committee : 

*T.  O.  McGrath,  "Taxing  the  Prospector/'  Engineering  and  Mining 
Journal,  November  9,  1918. 

2  "Application  of  Federal  Income  Tax  Laws  to  Mine  Taxa- 
tion," Engineering  and  Mining  Journal,  April  6,  1918. 


130  MINE  TAXATION  IN  MONTANA 

" While  there  are  always  present  elements  of 

speculation,  due  not  only  to  the  inherent  character  of  ore 
deposits,  but  also  to  the  uncertainty  of  future  market  con- 
ditions and  prices  (with  the  exception  of  gold),  there  are, 
nevertheless,  certain  principles  which  have  become  estab- 
lished as  classic  practice  in  mine  valuation. 

"In  Hoover's  treatise  on  the  principles  of  mining,  page  1, 
it  is  stated: 

"  'The  valuation  of  a  metal  mine  of  the  order  under  dis- 
cussion depends  upon 

(a)  The  profit  that  may  be  won  from  ore  exposed. 

(b)  The  prospective  profit  to  be  derived  from  extension 
of  the  ore  beyond  exposure. 

(c)  The  effect  of  a  higher  or  lower  price  of  metal  (ex- 
cept in  gold  mines). 

(d)  The  efficiency  of  the  management  during  realization.' 

"For  the  purpose  of  discussion  he  classifies  on  page  3  the 
factors  which  arise  in  connection  with  the  subject,  as  fol- 
follows : 

(a)  Determination  of  average  metal  contents  of  the  ore. 

(b)  Determination  of  quantities  of  ore. 

(c)  Prospective  value. 

(d)  Recoverable  percentage  of  gross  value. 

(e)  Price  of  metals. 

(f )  Cost  of  production. 

( g )  Redemption  of  re-amortization  of  capital  and  interest, 
(h)  Value  of  mines  without  ore  in  sight, 

(i  )   General  conduct  of  examination  and  reports. 

"In  chapter  5  of  the  same  work  there  is  a  discussion  of 
the  principles  of  redemption  and  re-amortization  of  capital 
and  interest  too  long  to  be  discussed  here,  but  by  the  ap- 
plication of  the  tables  calculated  and  published  therein  the 
present  worth  of  a  mine  of  known  earning  capacity,  with  de- 
veloped tonnage,  can  be  ascertained."1 

The  committee  further  states  that  the  application  of  these 
fundamental  principles  would  solve  the  problem  of  determining 
the  fair  market  value  of  a  mine.  The  committee's  opinion  may 
be  summarized  in  the  following  lines  from  its  report : 

"In  other  words,  having  arrived  at  potential  earning 
value  by  taking  tonnage,  metal  content,  probable  recovery, 
cost  of  extraction,  average  price  of  metals  and  the  life 

1  Ibidem.     Italics  mine. 


ASSESSMENT  AND  TAXATION  OF  MINES         131 

of  the  mine  at  a  definite  output  where  delimited  ore  bodies 
permit  and  according  to  the  best  obtainable  geological  and 
engineering  data  in  the  case  of  fissure  veins,  lenticular 
and  other  deposits  incapable  of  being  accurately  outlined, 
one  is  in  a  position,  by  using  Hoover's  or  equivalent  factors, 
to  determine  with  more  or  less  accuracy  the  present  worth 
of  the  mineral  deposit."  x 

For  the  people  of  Montana  the  above  report  has  the  additional 
significance  of  having  been  signed  by  Mr.  C.  F.  Kelly,  now  presi- 
dent of  the  Anaconda  Copper  Mining  Company.  It  would  seem 
logical  to  conclude,  that  if  the  principles  which  were  approved  by 
Mr.  Kelly  and  his  associates  were  applicable  to  federal  tax  leg- 
islation, they  could  also  serve  as  a  basis  for  state  taxation.  It 
would  also  seem  logical  to  suggest  that  all  the  data  prepared  for 
the  federal  government  should  be  used  by  the  state  for  its  own 
purposes.  As  a  result  of  the  Federal  Income  Tax  law,  the  A.  C. 
M.  Co.  and  other  mining  companies  in  Montana  must  now  have 
among  their  records'  full  data  showing  "fair  market  value  as  of 
March  1,  1913,"  estimates  of  probable  life,  annual  depletion 
deductions,  etc.,  in  a  word,  all  data  which  are  sufficient  for  the 
placing  of  a  definite  value  on  a  mine.  In  view  of  these  recent 
developments  and  of  the  possible  use  of  such  data,  the  objections 
against  the  ad  valorem  method  of  mine  taxation  have  lost  much 
of  their  force.  With  all  such  data  at  hand,  there  should  be  little 
difficulty  in  applying  the  ad  valorem  tax  even  to  the  mines  of 
Montana. 

The  case  of  the  ad  valorem  method  may  be  briefly  restated 
in  the  form  of  the  following  propositions: 

1.  Mining  engineers  distinguish  between  the  investment  and 
speculative  value  of  a  mine;  the  former  is  based  on  tested  data, 
the  latter  on  less  provable  estimates. 

2.  In  determining  the  investment  or  what  Mr.  Hoover  calls 
the  "ba&ic  value"  of  a  mine,  an  estimate  of  probable  life  is 
inevitable. 

3.  The  provision  of  depreciation,  exhaustion,  and  amortiza- 
tion funds  by  all  well-conducted  mining  companies,  as  well  as 
the  determination  of  profits,  implies  a  definite  estimate  of  the 
probable  life  of  the  mining  property. 

1  Ibidem.     Italics  mine. 


132  MINE  TAXATION  IN  MONTANA 

4.  The  corporation  income  tax  collected  by  the  federal  gov- 
ernment prescribes  a  method  of  computing  net  income  which 
requires  all  the  data  that  can  be  used  to  place  a  valuation  upon 
a  mine. 

5.  The  most  authoritative  representatives  of  the  mining  in- 
dustry have  within  the  past  few  years  admitted  the  possibility  of 
estimating  the  ore  reserves  and  life  of  a  mine  and  of  placing  a 
value  on  it  for  purposes  of  taxation. 

6.  The  value  of  a  mine  as  determined  by  the  records  of  min- 
ing companies  and  by  special  expert  appraisal  could  be  used  as 
a  basis  for  assessing  mines  under  the  general  property  tax. 

In  some  states,  however,  the  application  of  the  ad  valorem 
method  of  mine  taxation  has  been  found  temporarily  imprac- 
ticable. To  take  its  place,  another  procedure  has  been  devised 
which  places  a  value  on  a  mine  by  multiplying  net  earnings  by 
some  definite  factor.  This  may  be  done  in  several  ways'.  The 
net  earnings  of  each  year  may  be  taken  as  a  basis  and  multiplied 
by  two,  three,  four  or  any  other  number.  Or  the  average  net 
earnings  of  a  number  of  years  may  be  taken  and  multiplied  by 
some  number  or  "capitalized"  at  a  certain  percentage  varying 
with  the  character  of  the  mine.  These  procedures  may  best  be 
illustrated  by  the  history  of  mine  taxation  in  Arizona.  From 
1907  to  1912  all  producing  mines  in  Arizona,  which  was  then  a 
territory,  were  valued  '  *  for  an  amount  equal  to  25  per  cent  of  its 
gross  output  annually."  In  1913  the  Arizona  legislature  passed 
a  new  law  under  which  mines  were  to  be  valued  for  taxation 
purposes  at  an  amount  equal  to  4  times  the  net  plus  12J  per  cent 
of  the  gross  output  annually.  This  law  expired  in  1915,  and  no 
new  law  was  passed  by  the  legislature  to  take  its  place,  thus 
leaving  the  entire  matter  in  the  hands  of  the  tax  officials.  The 
Arizona  Tax  Commission  then  adopted  the  method  of  capitaliz- 
ing net  earnings  in  the  following  manner.  All  productive  pat- 
ented and  unpatented  mines  and  mining  claims  were  divided 
into  eight  classes: 

Class  1.  Copper  mines  whose  ore  bodies  are  found  in  veins', 
fissures  and  lenses,  and  do  not  show  evidence  of  exhaustion. 

Class  2.  Copper  mines  whose  ore  bodies'  consist  of  porphyry 
deposits  and  large  acreages  of  contiguous  ground  largely  un- 
explored and  undeveloped. 


ASSESSMENT  AND  TAXATION  OF  MINES         133 

Class  3.  Copper  mines  whose  ore  bodies  consist  of  developed 
low  grade  porphyry  deposits1. 

Class  4.  Copper  mines  whose  ore  deposits  show  evidences'  of 
exhaustion. 

Class  5.  Gold  and  silver  mines  whose  ore  deposits'  show  evi- 
dences of  exhaustion. 

Class  6.  Gold  and  silver  mines  whose  ore  bodies  have  not 
shown  evidences  of  exhaustion. 

Class  7.     Zinc  and  lead  mines. 

Class  8.     All  producing  mines  of  irregular  output. 

In  addition  to  these  classes,  the  Commission  in  May,  1916, 
created  three  more  groups:  Subdivision  A,  including  all  such 
properties  as  have  entered  the  profitable  productive  stage  during 
the  year  1916;  Subdivision  B,  including  properties'  which  have 
suspended  profitable  production  during  the  period  under  con- 
sideration, for  reasons  other  than  market  or  physical  conditions ; 
and  Subdivision  C9  including  properties  that  have  suspended 
profitable  production  when  said  properties  could  have  been  op- 
erated at  a  profit  during  the  period  under  consideration. 

The  Commission  then  classified  all  the  mines  and  mining  claims 
of  Arizona  into  these  eight  classes  and  subdivisions'.  In  deter- 
mining the  net  earnings  of  each  mine,  no  deduction  was  allowed 
for  mine  depletion,  interest  charges,  new  construction,  acquisi- 
tion of  new  real  estate  or  depreciation  on  personal  property.  De- 
preciation was  taken  care  of  by  means  of  the  factor  used  in  cap- 
italizing the  mines.  The  average  annual  net  proceeds  for  a  pe- 
riod of  four  years  was  taken  as  the  basis,  and  the  factors  of  cap- 
italization were  15  per  cent  for  classes  1,  2  and  3  and  their  sub- 
divisions; 20  per  cent  for  class  4  and  its  subdivisions;  25  per 
cent  for  classes  5,  6  and  7 ;  and  33£  per  cent  for  class  8.  These 
capitalizing  factors  were  considered  sufficiently  large  to  allow 
for  depreciation,  amortization,  and  capital  charges. 

The  results  of  these  various'  methods  as  applied  in  Arizona 
since  1910  may  be  seen  from  the  following  table. 


134 


MINE  TAXATION  IN  MONTANA 


TABLE  XXIX. 


Tear 

Total  assessment 
of  property 
in  Arizona 

Assessment  of 
mining  property 
of  all  descriptions 

Per   cent   of 
total 

1916 
1915 
1914 
1913 
1912 
1911 
1910 

$486,406,518 
420,532,411 
407,267,393 
375,862,414 
140,338,191 
98,032,708 
86,126,226 

$216.879,796 
159,109.288 
146.672,395 
140,488,648 
45,145,084 
19.242,331 
19,714,592 

44.2 
37.4 
35.7 
37.2 
31.7 
19.3 
22.9 

This  table  shows  that  when  the  method  of  valuing  the  mines 
at  four  times  the  net  and  one-eighth  the  gross  output  was  intro- 
duced in  1913,  it  more  than  trebled  the  assessment  of  the  mining 
properties,  and  that  when  the  new  method  of  capitalizing  the  net 
earnings  was  introduced,  the  valuation  of  the  mines  rose  from 
35.7  per  cent  of  the  total  valuation  of  the  state  to  44.2  per  cent 
in  1916.  In  1916  the  total  assessment  of  Arizona  was  about  three 
and  a  half  times  greater  than  in  1912 ;  but  the  assessment  of  the 
mining  property  of  Arizona  was  almost  five  times  greater  in 
1916  than  in  1912.  Yet  there  is  no  indication  that  this  increase 
in  the  assessment  of  mining  property  has  in  any  way  interfered 
with  or  discouraged  the  growth  of  the  industry  in  that  state.  Ac- 
cording to  the  report  of  the  Arizona  Tax  Commission,  but  a  few 
mining  companies  contested  its  findings  and  assessments. 

It  is  interesting  to  note  the  results  that  would  have  been  ob- 
tained, had  Montana  used  the  methods  of  assessing  mines  adopted 
in  Arizona.  The  following  table  presents  these  results  in  compar- 
ative form  for  both  methods  described  above : 

TABLE  XXX. 


Tear 

Actual  assessment 
of  mining  property 
in  Montana 

Estimated   assess- 
ment  of   Montana 
mines   based   on 
Arizona  method  of 
multiplying  net  by 
4  and  gross  by% 

Estimated   assess- 
ment of  Montana 
mines  based  on 
Arizona  method  of 
capitalizing  net 
earnings 

1917 

1916 

1915 
-10-14 

$  62,012,058 
43,710,854 
24,759,863 
26  178  435 

$199,765,344 
125.814,812 
50,201,980 
54  732  046 

$127,495,540 
109,145,926 
81,664,140 

-in-jq 

27  7W  2*^4 

66991389 

ASSESSMENT  AND  TAXATION  OF  MINES         135 

It  may  be  seen  from  the  above  table  that  under  either  of  the 
methods  used  in  Arizona  in  the  past  five  years,  the  assessment 
of  mining  property  in  Montana  would  have  been  at  least  from 
two  to  three  times  greater  than  it  actually  was. 

Many  tax  officials  and  mining  engineers'  who  vigorously  op- 
pose the  ad  valorem  tax  on  mines  are  in  favor  of  taxing  mines 
by  multiplying  net  earnings  by  some  factor,  as  described  above. 
If  this  method  were  adopted  in  Montana,  it  would  not  eliminate 
all  the  defects  pointed  out  in  Chapter  VII.  But  it  would  cer- 
tainly raise  the  assessment  of  the  mining  industry  and  bring  such 
assessments  nearer  actual  market  value. 

In  addition  to  the  methods  of  mine  taxation  already  discussed, 
another  method  must  be  mentioned,  namely,  that  of  taxing  mines' 
on  their  income.  In  many  ways,  such  a  tax  would  seem  prefer- 
able to  all  the  other  methods  described.  It  would  eliminate  the 
arbitrariness  involved,  for  instance,  in  multiplying  net  earnings 
by  some  factor  or  in  determining  a  rate  on  gross  output.  It 
would  probably  also  be  more  conducive  to  the  conservation  of 
mineral  resources  and  to  the  prosecution  of  exploration  and  de- 
velopment work.  There  are,  however,  many  objections'  to  this 
method  which  are  summarized  by  the  Committee  on  Mine  Tax- 
ation to  the  National  Tax  Association  in  the  following  words : 

"To  compute  net  income,  it  is  necessary  to  deduct  as 
depreciation  or  depletion  a  share  of  the  investment  in  the 
mine  equal  to  the  share  of  the  mineral  content  taken  out  in 
the  year  in  question;  and  to  measure  this  share  or  per- 
centage one  must  know  or  estimate  the  amount  of  ore  in 
the  ground.  If  it  be  true  that  the  value  of  the  mine  can 
never  be  known  until  the  last  ton  is  mined  it  is  equally  true 
that  the  net  income  of  the  mine  can  never  be  known  until 
the  last  ton  is  mined.  The  two  methods  of  taxation  require 
the  same  data. 

"American  property  taxes  are  in  general  so  high 
and  take  so  large  a  part  of  the  annual  income  that  if  con- 
verted into  terms  of  income  taxation  they  would  appear 
excessive.  Few  legislatures  could  be  persuaded  to  impose 
an  income  tax  on  mines  equal  to  the  share  of  the  net  in* 
come  regularly  taken  from  farms,  railroads,  and  similar 
enterprises. 

"The  property  tax  is  imposed  year  after  year  on  idle 
property  or  property  which  for  speculative  purposes  is  held 
out  of  production,  whereas  the  income  tax  applies  only 


136  MINE  TAXATION  IN  MONTANA 

when  the  property  is  worked.  So  long  as  the  property  tax 
represents  the  general  rule  and  is  applied  to  other  prop- 
erties, it  should  be  applied  to  mines. 

"Finally,  with  the  income  tax,  uncertainty  and  pos- 
sible inadequacy  of  the  tax  are  likely  to  result,  unless  the 
minimum  output  is  regulated  by  the  state."  x 

In  a  sense,  an  income  tax  may  be  said  to  exist  at  the  present 
time  in  Montana.  The  Corporation  License  Tax  law,  passed  in- 
1917,  is  in  reality  a  tax  on  the  net  income  of  corporations.  That 
the  A.  C.  M.  Co.  and  other  mining  companies  in  the  state  are 
paying  taxes1  under  this  law  proves  that  they  are  in  possession 
of  sufficient  data  to  estimate  the  probable  life  of  the  mines  and 
the  amount  to  be  charged  off  for  exhaustion  in  order  to  compute 
net  income.  As  pointed  out  above,  the  availability  of  such  data 
removes  the  most  serious  obstacles  in  the  way  of  the  ad  valorem 
method  of  mine  taxation.  On  the  other  hand,  the  experience  of 
Montana  corroborates  the  fears  expressed  by  the  Committee  of 
the  National  Tax  Association.  The  legislature  of  1917  could 
not  be  induced  to  raise  the  rate  of  taxation  to  2  per  cent  on 
the  net  income  of  corporations,  though  such  is  the  rate  in  s'ome 
other  states.  It  was  also  impossible  to  pass  an  amendment  to 
the  law,  providing  for  a  graduated  rate  which  would  have  re- 
lieved the  smaller  corporations  and  would  have  placed  a  larger 
burden  on  the  larger  and  more  prosperous  corporations.  It  should 
be  noted,  however,  that  the  present  Corporation  License  Tax  law 
is  an  instrument  which  can  be  improved  and  which  can  be  made 
to  serve  the  purpose  of  equalizing  the  burden  of  taxation  be- 
tween classes  of  property. 

In  discussing  the  various  methods  of  mine  taxation,  reference 
has  been  repeatedly  made  to  the  differences  between  producing 
and  non-producing  mines.  A  frequent  objection  to  one  or  the 
other  method  is  that  it  would  fall  with  equal  force  on  productive 
and  non-productive  mines.  The  force  of  this  objection  is  the 
general  opinion  that  all  mining  claims1  for  purposes  of  taxation 
should  be  divided  into  producing  and  non-producing,  and  that 
these  two  classes  should  be  treated  differently.  The  tax  methods 
analyzed  above  were  considered  in  relation  to  producing  mines 
only.  The  latter  are  the  foundation  of  the  mining  industry,  and 

1  National  Tax  Association,  1913,  P-  390. 


ASSESSMENT  AND  TAXATION  OF  MINES         137 

the  elaboration  of  proper  methods  for  taxing  them  is  the  chief 
problem  of  mine  taxation. 

In  so  far  as  non-producing  mines1  are  concerned,  the  problem 
is1  to  find  a  tax  method  which  would  not  impose  undue  burdens 
and  yet  would  not  tend  to  discriminate  in  favor  of  such  mining 
property  as  compared  with  other  classes  of  property.  It  is  gen- 
erally admitted  that  the  assessment  of  non-producing  mines  at 
"true  value"  can  in  most  cases  be  little  more  than  guesswork. 
The  Committee  on  the  Taxation  of  Mines1  to  the  National  Tax 
Association  expressed  this  opinion  in  the  following  words: 

"The  mineral  content  and  value  of  unexplored  and  un- 
developed ore  bodies,  patented  mines  and  mining  claims  is 
frequently  so  uncertain  that  for  this  class  of  properties 
there  is  ample  justification  for  conservative  treatment  and 
even  for  postponing  the  full  possible  claim  of  the  state 
until  actual  knowledge  of  the  situation  can  be  obtained."  * 

Just  how  non-producing  mines  should  be  assessed  is  a  matter 
of  dispute.  Some  states  value  them  at  the  price  "paid  the 
United  States  therefor,"  that  is,  at  five  dollars  an  acre  for 
quartz  and  two  and  a  half  dollars  an  acre  for  placer  claims.  Such 
is  the  law  in  Montana.  In  the  State  of  Nevada  they  are  assessed 
arbitrarily  at  fifty  dollars  per  acre.  In  Michigan  in  1916,  their 
value  was  fixed  at  44  per  cent  of  the  capital  stock.  The  Com- 
mittee on  Mine  Taxation  to  the  American  Mining  Congress  at 
its  annual  conference  in  1914  suggested  that  "non-producing 
mining  claims  should  not  be  assessed  upon  a  value  higher  than 
adjacent  land,  not  assessed  for  mining  purposes,  is  assessed."2 
There  are  others  who  think  that  mineral  ground  should  be  com- 
pletely exempt  from  taxation  until  it  becomes  productive.3  It  is 
evident  that  such  lenient  treatment  might  encourage  the  specu- 
lative holding  of  mineral  property.  P.  J.  Miller,  member  of  the 
Arizona  State  Tax  Commission  who  generally  favors  conservative 
treatment  of  mining  property,  has  pointed  out  that  where  a 
mining  claim  is  situated  in  a  proven  district  or  lies  adjacent  to 
some  producing  claim  "it  is  necessary  to  place  a  reasonable  as- 

1  National  Tax  Association,  Proceedings  for  1913,  P.  388. 

2  Second  Biennial  Report,  Arizona  State  Tax  Commission,  p.  62. 

*E.  D.  Boyle,  "Mine  Taxation,"  National  Tax  Association,  1915,  p.  85. 


138  MINE  TAXATION  IN  MONTANA 

sessment  on  such  ground  in  order  to  prevent  persons,  companies, 
or  corporations  from  acquiring  a  large  number  of  claims'  and 
letting  them  lie  idle,  thereby  retarding  development  of  a  great 
part  of  an  entire  district. '  ' 1 

Mr.  Charles  K.  Leith,  professor  of  geology  at  the  University 
of  Wisconsin,  has1  also  pointed  out  that  large  acreages  of  mineral 
lands  in  the  Lake  Superior  region  are  held  by  old  estates  which 
originally  acquired  the  lands  for  timber  and  are  now  selling  off 
surface  rights  for  farming,  retaining  the  mineral  rights.  The 
original  cost  of  this  land  has  long  since  been  returned,  and  the 
present  owners  may  hold  the  mineral  rights  in  reserve  for  a  long 
period  without  much  cost  where  not  taxed.  A  tax  on  such  unex- 
plored mineral  land  would  either  stimulate  exploration  and  pro- 
duction or  bring  the  lands  back  into  the  patrimony  of  the  state.2 
The  question  is  of  some  importance  in  the  State  of  Montana  where 
reservations  in  deeds  to  the  right  of  coal,  oil,  gas,  etc.,  have  for 
many  years  been  made  by  corporations'  owning  large  tracts  of 
land.  It  is  also  claimed  by  some  that  a  distinction  should  be  made 
between  copper,  lead  and  zinc  mines',  and  gold  and  silver  mines, 
because  the  methods  of  taxation  applicable  to  the  former  are  not 
always  suitable  in  the  case  of  the  latter. 

It  cannot  be  asserted  dogmatically  that  one  or  the  other  meth- 
od of  taxation  discussed  in  this1  chapter  should  be  adopted  in 
Montana.  A  definite  conclusion  as  to  the  best  method  for  Mon- 
tana could  be  reached  only  after  a  thorough  study  of  the  books 
and  records  of  the  mining  companies  of  the  state  such  as  has  not 
yet  been  made.  But  the  survey  of  methods  and  of  the  experience 
of  other  states  sketched  in  this  chaper  is  sufficient  to  dispel 
the  illusion  so  assiduously  maintained  by  some  that  the  assess- 
ment and  taxation  of  mines  is  a  special  mystery  which  can  be  com- 
prehended only  by  the  initiated  few.  This  illusion  has1  long  since 
vanished  in  other  states  in  the  light  of  the  true  facts. 

1  Report  of  Arizona  State  Tax  Commission,  1914,  P-  68. 

2  Ch.  K.  Leith,  "Conservation  of  Certain  Mineral  Reserves,  in  Founda- 
tions of  National  Prosperity,  p.  365. 


CHAPTER  XI. 

PRACTICAL  SUGGESTIONS. 

It  has  been  repeatedly  pointed  out  in  this  essay  that  the  ques- 
tion of  mine  taxation  is  but  a  pha&'e  of  the  general  problem  of 
reforming  the  tax  system  of  the  state.  It  is  therefore  impossible 
to  suggest  a  comprehensive  change  in  the  mine  tax  law  without  a 
preliminary  solution  of  the  more  fundamental  tax  problems.  The 
adequacy  of  the  method  of  mine  taxation  which  might  be 
adopted  will  depend  on  whether  the  State  of  Montana  retains 
the  general  property  tax  in  its  present  form,  or  introduces  a 
classified  property  tax,  or  adopts  a  state  income  tax,  or  in  any 
other  way  radically  changes  the  general  structure  of  the  state 
tax  system.  Until  these  more  general  problems  are  settled,  the 
question  of  mine  taxation  cannot  be  finally  answered. 

Pending  a  comprehensive  revision  of  the  tax  system  of  the 
state,  all  one  can  suggest  at  the  present  time  are  such  amend- 
ments 'in  the  law  as  are  necessary,  in  order  to  improve  the  ad- 
ministration of  the  law  as  it  now  exists  and  to  prepare  the  ground 
for  more  vital  changes  in  the  future.  In  accordance  with  the 
defects  pointed  out  in  Chapter  VII,  the  suggestions  for  remedial 
legislation  are  here  presented  in  similar  order. 

In  the  first  place,  it  would  be  necessary  to  repeal  Section  3  of 
Article  XII  of  the  Constitution  which  provides  a  special  method 
for  taxing  the  mines.  The  repeal  of  this  section  would  place  the 
mines  of  the  state  on  an  equal  basis  with  all  other  property.  The 
legislative  bodies  and  tax  authorities  of  the  state  would  then  be 
in  a  position  to  deal  freely  with  the  problem.  The  repeal  of  Sec- 
tion 3  is  a  constitutional  change  which  must  be  voted  on  by  the 
people  at  a  general  election. 

Secondly,  if  the  facts  justify  the  belief  that  the  Montana  meth- 
od of  mine  taxation  results  in  inequalities  between  the  mines  and 
other  classes  of  property,  such  inequality  could  be  somewhat 
equalized  by  amending  Section  2500  of  the  Revised  Codes  of 
1907.  According  to  this  section,  the  net  proceeds  of  mines1  are 
taxed  as  personal  property.  There  would  seem  to  be  nothing  in  the 

139 


140  MINE  TAXATION  IN  MONTANA 

constitution  to  prevent  an  amendment  of  this  section  by  which 
the  net  proceeds  of  the  mines  could  be  assessed  at  twice  or  three 
times  their  reported  value.  That  is,  the  net  proceeds  as  reported 
by  the  mines  could  be  multiplied  by  two  or  three  for  purposes  of 
assessment.  As  pointed  out  above,  such  a  procedure  was  in  use 
for  a  time  in  Arizona  and  is'  favored  by  many  tax  officials.  To 
equalize  the  fluctuations  in  net  proceeds  from  year  to  year,  the 
average  net  proceeds  for  three  or  five  years  could  be  taken  as 
a  basis. 

Thirdly,  section  2565  of  the  Revised  Codes,  which  contains  the 
provision  as  to  what  deductions  should  be  made  from  gross 
proceeds  to  determine  net  proceeds  could  be  amended  in 
accordance  with  what  has  been  done  in  other  states.  As 
pointed  out  above,  the  Montana  law  allows  the  deduc- 
tion of  all  expenses  for  new  construction.  Such  was  the 
practice  in  other  states  for  many  years.  But  the  tendency 
in  recent  years  has  been  to  change  to  the  method  used  by  the 
mining  companies  themselves  in  their  accounting.  For  instance, 
in  1913  the  Nevada  Tax  Commission  by  agreement  with  the  min- 
ing companies  of  the  State  of  Nevada  arranged  ''that  the  cost 
of  mine  plants  should  be  reduced  by  depreciation  charges  over 
the  whole  life  of  the  mine,  and  not  as  lump  charges  at  the  time 
of  construction."  Furthermore,  the  agreement  also  provided 
that  no  investment  in  plant  should  be  allowed  to  depreciate  to 
less  than  twenty  per  cent  of  its  original  cost  during  its  operation, 
and  that  all  depreciation  charges  should  then  cease.  The  Arizona 
Tax  Commission  also  refuses  to  allow  deductions  for  mine  deple- 
tion, interest  charges,  or  new  construction  in  the  computation  of 
net  proceeds. 

Whether  Section  2565  of  the  Codes  is  amended  as  suggested 
or  not,  it  would  seem  desirable  to  provide  for  a  more  uniform 
system  of  computing  net  proceeds  and  for  central  supervision 
over  the  process.  The  necessity  of  this1  has  long  been  recognized 
by  tax  officials  and  by  mining  men  themselves.  The  American 
Mining  Congress  in  1914  adopted  a  declaration  in  favor  of  a 
uniform  system  of  accounting  for  the  various  mines  of  a  state. 
Several  states  have  made  provision  for  the  supervision  of  mine 
accounts  by  the  central  tax  authorities  of  the  state.  The  Consti- 
tution of  Utah  provides  that  the  net  annual  proceeds  of  the 


PRACTICAL  SUGGESTIONS  141 

mines  shall  be  appraised  and  taxed  by  the  State  Board  of  Equali- 
zation. The  laws  of  New  Mexico  give  the  State  Tax  Commission 
the  power  to  prescribe  the  method  of  keeping  accounts*  for  the 
mining  companies  and  mine  owners.  In  Arizona  the  State  Tax 
Commission  assesses  the  mining  property  of  the  state.  The 
reasons  for  this  general  tendency  were  pointed  out  in  Chap- 
ter VII. 

Of  the  amendments  suggested  above  the  repeal  of  Section  3  of 
Article  XII  of  the  Constitution  would  seem  the  most  essential. 
But  to  achieve  the  purpose  of  a  scientific  revision  of  the  tax  sys- 
tem of  the  state  in  the  near  future,  another  step  in  the  same 
direction  would  seem  necessary.  The  State  of  Montana  is  ap- 
parently to  have  a  permanent  tax  commission  which  will  be 
created  oy  the  present  legislature.  The  bills  which  have  been 
drafted  by  the  Temporary  Tax  and  Licens'e  Commission  provide 
considerable  powers  of  investigation  for  the  permanent  commis- 
sion and  enlarged  powers  of  supervision  for  the  State  Board  of 
Equalization.  However,  might  not  the  problem  of  mine  taxation 
in  Montana  be  considerably  advanced  by  specific  instructions  to 
the  permanent  tax  commission  to  make  a  special  study  of  the 
problem  and  to  report  to  the  next  legislature.  With  the  facts 
which  could  be  made  available  and  with  the  resources  which  a  per- 
manent tax  commission  could  have  at  its  command,  such  an  in- 
vestigation should  result  in  a  complete  elucidation  of  the  situa- 
tion. With  such  a  report  before  them,  the  people  of  Montana 
should  have  no  difficulty  two  years1  hence  in  solving  a  problem 
which  has  been  the  cause  of  so  much  perplexity  and  friction. 


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